4 Reasons Alibaba Could More Than Triple From Here

Summary

  • Alibaba has become one of the most contested companies on Seeking Alpha, thanks to its worst bear market in history, causing a nearly 60% peak decline.
  • According to 68 analysts, rating agencies, and the bond market, BABA’s growth thesis has weakened, but not broken.
  • Historically, BABA growing at 14% is worth 26X earnings, and it trades at 15.8 and under 12, including cash. It’s 41% undervalued and a classic Buffett “fat pitch” blue-chip bargain.
  • Over the next five years, analysts expect BABA could deliver 220% returns, or 24% annually, with 5X the risk-adjusted expected returns of the S&P 500.
  • Charlie Munger has invested $67 million into BABA and I’ve bought $135,000 into this Buffett-style “fat pitch” speculative opportunity because A+ rated BABA is as close to a perfect speculative deep value growth investment as exists on Wall Street. As Buffett says, “When it’s raining gold, reach for a bucket, not a thimble.”
Diy13/iStock via Getty Images

Alibaba has become one of the fiercest debates on Seeking Alpha and it is not hard to see why.

Whenever a blue-chip falls almost 60% very quickly, it’s natural that bulls and bears will debate whether it’s a value trap or potentially the buying opportunity of a lifetime.

With over 80 regulatory actions and counting in virtually all parts of the economy, it’s easy to see why many investors are worried about whether China’s recent “common prosperity” approach might strip shareholders of property rights.

  • Ark Invest’s Cathie Wood says China’s wide-ranging clampdown will lead to an economic downturn for the country

I really do think that the policymakers in China are beginning to play with fire,” she said during her webinar, according to Reuters. “We will look back at this period in six months and say ‘Wasn’t it obvious there will be a major and unexpected slowdown in China?” – Business Insider

No less than Cathie Wood is warning the regulatory crackdown, which is scheduled to see new regulations roll out through the rest of the year, but with implementation potentially lasting five years, warns that Beijing risks going too far and potentially slowing the economy to a crawl.

I’m not pessimistic about China in the long run because I think they’re a very entrepreneurial society,” Wood told Bloomberg in September. “Sure, the government is putting more rules and regulations in, but I don’t think the government wants to stop growth and progress at all.” – Business Insider

However, ultimately Wood is still bullish on China and she’s not the only one.

Who’s bullish on China Tech Besides DK?

  • Ray Dalio
  • JPMorgan
  • Blackstone
  • MSCI
  • Cathie Wood
  • Charlie Munger
  • Mathews Asia
  • Morningstar
  • 59 analyst consensus expecting a 46% 12-month rally

Charlie Munger Has Invested $67 Million Into Alibaba

(Source: Whalewisdom)

Charlie Munger is one of the greatest investors in history and has been Buffett’s right hand since 1978.

In the Daily Journal portfolio he manages, he’s invested $67 million into BABA so far, and raised his stake 82% in the last quarter.

I don’t use technical analysis, and I don’t care how pretty a company’s charts are. You can’t buy a company at the best valuation in history except when the charts are ugly, and fear, uncertainty, and doubt reign supreme.

BABA Peak Declines Since 2015 (Crackdowns In 2015 and 2018)

(Source: Portfolio Visualizer)

The last time BABA was down 50% it delivered 38% CAGR returns over the next 5 years. That’s 5X your investment in 5 years.

Rule number one: most things will prove to be cyclical. Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.” – Howard Marks

Buying BABA during its frequent bear markets has historically been a glorious strategy for anyone comfortable with this company’s complex risk profile.

Daily Blue-Chip Deal Video: Alibaba, Earnings Prove This Hyper-Growth SWAN Is Still A Very Strong Buy

Here is an exclusive deep dive video on BABA’s, including a very thorough examination of BABA’s complex risk profile, covering everything from VIE regulatory risk to governance issues and de-listing concerns.

The most important risk is VIE regulatory risk which represents the worst-case, doomsday scenario.

All Chinese tech stocks have VIE regulatory risk, why they are inherently speculative, regardless of overall quality and why we recommend a 2.5% or less max risk cap.

If VIE were revoked (low probability, long-tail risk according to analysts, credit rating agencies, and even Chinese regulators themselves) then foreign investors could lose 100% of property rights and potentially make every Chinese tech stock worth zero.

HK shares are also under VIE (HK is considered a foreign market) meaning that converting ADRs into Hong Kong shares wouldn’t protect against this worst-case scenario.

I’ve personally invested $135,000 into Alibaba, at its lowest valuations in history, including as low as $142.68. But that doesn’t mean it’s a sacred cow.

When the facts change, I change my mind. What do you do sir?” – John Maynard Keynes

There are no sacred cows at Dividend Kings, wherever the fundamentals lead we always follow. That’s the essence of disciplined financial science, the math behind getting and staying rich on Wall Street.

There is no question that Alibaba’s thesis has been weakened by Beijing’s relentless regulatory onslaught.

In this article, I will make very clear why Alibaba isn’t right for everyone, sugar coating nothing when it comes to this company’s quality and full investment thesis.

But Alibaba has rallied 19% off its October 4th lows, smashing the S&P, Nasdaq, and even outperforming China tech by almost 2X.

And the simple fact is, that based on the best available evidence, specifically the 68 expert consensus which includes eight rating agencies, 60 analysts, and the bond market, Alibaba remains one of the best blue-chip bargains hiding in plain sight.

One that’s likely to soar even more in the coming years, and potentially generate Buffett-like returns from the 41% undervalued tech king of China. A company that, if analysts are right, could deliver 220% returns over the next 5 years, more than tripling your investment.

So let’s examine the four reasons to be bullish on Alibaba as well as the risk profile that means some investors will want to stay away regardless of how attractive the valuation becomes.

Reason One: Strong Fundamentals

The Dividend King’s overall quality scores are based on a 207 point model that includes

  • dividend safety
  • balance sheet strength
  • short and long-term bankruptcy risk
  • accounting and corporate fraud risk
  • profitability and business model
  • growth consensus estimates
  • cost of capital
  • long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters’/Refinitiv and Just Capital
  • management quality
  • dividend friendly corporate culture/income dependability
  • long-term total returns (a Ben Graham sign of quality)
  • analyst consensus long-term return potential

It includes over 1,000 metrics if you count everything factored in by 12 rating agencies we use to assess fundamental risk.

  • credit and risk management ratings make up 38% of the DK safety and quality model
  • dividend/balance sheet/risk ratings make up 77% of the DK safety and quality model

How do we know that our safety and quality model works well?

During the two worst recessions in 75 years, our safety model predicted 87% of blue-chip dividend cuts during the ultimate baptism by fire for any dividend safety model.

Balance Sheet Safety score: 77% – 4/5- safe (A+ stable credit rating from S&P, Fitch, and Moody’s, 0.6% 30-year bankruptcy risk)

Dependability score: 59% – 3/5 – average dependability

Quality score: 77% – 10/13 Blue-Chip (Sleep Well At Night) – speculative

Long-term risk management consensus: 24th industry percentile – poor

2021 average fair value: $245.52

2022 average fair value: $296.29

12-month forward fair value: $285.55

Current Price: $166.78

Discount To Fair Value/Margin of safety: 41.59%

DK rating: potential strong but speculative buy

Potential Good buy price (25% margin of safety): $214.16

Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential
Alibaba 0.0% 14.2% 14.2%
High-Yield 2.8% 11.2% 14.0%
Value 2.1% 11.9% 14.0%
High-Yield + Growth 1.7% 11.0% 12.7%
Safe Midstream 6.1% 6.2% 12.3%
Safe Midstream + Growth 3.3% 8.5% 11.8%
Nasdaq (Growth) 0.5% 10.9% 11.4%
CL, KMB, AOS, SWK 2.4% 8.9% 11.3%
Dividend Aristocrats 2.4% 8.9% 11.3%
REITs + Growth 1.8% 8.9% 10.6%
S&P 500 1.5% 8.5% 10.0%
REITs 3.0% 6.9% 9.9%
60/40 Retirement Portfolio 1.8% 5.1% 6.9%

(Source: Morningstar, FactSet Research)

Even with growth estimates dropping in recent weeks, Alibaba is still one of the best long-term strategies for compounding wealth on Wall Street.

What makes Alibaba a speculative blue-chip?

Alibaba is the world’s largest online and mobile commerce company, measured by GMV (CNY 6.6 trillion/USD 1 trillion for the fiscal year ended March 2020). It operates China’s most-visited online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer).

Alibaba’s China commerce retail division accounted for 69% of revenue in the December 2020 quarter, with Taobao generating revenue through advertising and other merchant data services and Tmall deriving revenue from commission fees.

Additional revenue sources include China commerce wholesales (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (7%), digital media and entertainment platforms (4%), Cainiao logistics services (5%), and innovation initiatives/other (2%).” – Morningstar

It’s not just the tech king of China, it’s literally the e-commerce king of the world.

BABA is the Amazon, Facebook, Microsoft, Alphabet, and PayPal of China. Imagine a single company that basically represented a Chinese Nasdaq, that’s Alibaba.

It’s led by one of the best management teams in the industry.

We assess the capital allocation of Alibaba as Exemplary.

The shareholder distribution policy of Alibaba is appropriate with a sound balance sheet…

We believe management has also done a commendable job investing in businesses to solidify its leadership in e-commerce, cloud, and logistics.

These investments will go into technology, merchant supports, user acquisition, user experience enhancement, improving the supply chain, and merchandising for high-frequency categories.

We like management’s goal to increase annual active consumers in China by over 100 million versus 85 million achieved in the fiscal year 2021, which is one of the outcomes of the investments. This will further enhance the network effect of wide-moat Alibaba.” – Morningstar (emphasis added)

Credit rating agencies like S&P assess over 1,000 fundamental risks when estimating a company’s total risk profile.

BABA Credit Ratings

Rating Agency Credit Rating 30-Year Default/Bankruptcy Risk Chance of Losing 100% Of Your Investment 1 In
S&P A+ stable outlook 0.60% 166.7
Fitch A+ stable outlook 0.60% 166.7
Moody’s A1 (A+ equivalent) stable outlook 0.60% 166.7
Consensus A+ stable outlook 0.60% 166.7

(Source: S&P, Fitch, Moody’s)

That includes regulatory and political risk, and all three rating agencies estimate a 1 in 167 chance of BABA going bankrupt in the next 30 years.

BABA Leverage Consensus Forecast

Year Debt/EBITDA Net Debt/EBITDA (3.0 Or Less Safe According To Credit Rating Agencies) Interest Coverage (8+ Safe)
2020 0.94 -2.47 18.47
2021 0.52 -2.39 15.45
2022 0.52 -3.11 19.86
2023 0.36 -3.12 23.39
2024 0.44 -3.84 31.00
2025 0.40 NA 36.41
Annualized Change -15.89% 11.63% 14.53%

(Source: FactSet Research Terminal)

BABA has a net cash balance sheet, that’s expected to keep getting stronger over time.

BABA Balance Sheet Consensus Forecast

Year Total Debt (Millions) Cash Net Debt (Millions) Interest Cost (Millions) EBITDA (Millions) Operating Income (Millions) Interest Costs
2020 $20,807 $49,773 -$54,521 $693 $22,077 $12,803 3.33%
2021 $15,968 $77,268 -$72,889 $899 $30,497 $13,894 5.63%
2022 $15,968 $103,287 -$95,875 $912 $30,781 $18,115 5.71%
2023 $13,570 $133,939 -$117,528 $1,014 $37,656 $23,722 7.47%
2024 $20,656 $183,636 -$179,802 $985 $46,880 $30,532 4.77%
2025 $20,656 $237,145 NA $985 $52,056 $35,859 4.77%
2026 NA NA NA NA $69,951 $48,971 #DIV/0!
Annualized Growth -0.15% 36.65% 34.76% 7.29% 18.72% 22.87% 7.44%

(Source: FactSet Research Terminal)

BABA’s cash position is so strong that even $2.8 billion fines and $15.5 billion its donating to the “common prosperity” efforts through 2025, likely won’t significantly hurt this business.

By 2025 analysts expect BABA to have $237 billion on its balance sheet. How big is that?

  • if BABA’s 2025 consensus cash position was its own country it would be the 51st largest economy in the world
  • just behind New Zealand’s and more than Peru’s

(Source: Gurufocus Premium)

The Beneish M-score is 73% historically accurate at catching accounting fraud and 82.5% accurate at finding companies with honest accounting.

Students at Cornell University using just the M-score predicted the Enron fraud.

  • BABA uses GAAP accounting and so has relatively smaller de-listing risk

We can say with an 82.5% statistical probability that BABA is NOT cooking its books.

Confirmed by S&P, Fitch, Moody’s, and PricewaterhouseCoopers Hong Kong (its auditor).

Bond Investors Still Love Alibaba

(Source: FactSet Research Terminal)

BABA’s bond maturity schedule is very easy to handle (more cash than debt = it could pay off all debt immediately if it wanted to).

Bond investors are confident enough in BABA to lend to it for 40 years at 3.6% and bond investors are the “smart-money” on Wall Street.

On Wall Street profitability is the preferred proxy for company quality.

(Source: Gurufocus Premium)

BABA’s wide moat is confirmed by historical profitability in the top 20% of peers.

BABA Trailing 12-Month Profitability Vs Peers

Metric Industry Percentile Major Cyclical Retailers More Profitable Than BABA (Out Of 1,058)
Operating Margin 79.77 214
Net Margin 94.68 56
Return On Equity 73.96 276
Return On Assets 83.41 176
Return On Capital 93.42 70
Average 85.05 158

(Source: Gurufocus Premium)

In the last year, despite aggressive growth spending and relatively high taxes for a tech company, BABA’s profitability was in the top 15% of peers.

BABA has consistently generated very strong free cash flows despite its growth spending.

BABA Profit Margin Consensus Forecast

Year AFFO Margin EBITDA Margin EBIT (Operating) Margin Net Margin Return On Capital Expansion Return On Capital Forecast
2020 26.1% 30.9% 17.9% 29.3% 1.44
2021 23.1% 27.4% 12.5% 21.0% TTM ROC 102.3%
2022 17.8% 21.6% 12.7% 15.1% Latest ROC 102.1%
2023 17.8% 21.9% 13.8% 14.8% 2026 ROC 147.5%
2024 17.1% 22.7% 14.8% 15.5% 2026 ROC 147.2%
2025 17.3% 21.7% 14.9% 12.9% Average 147.4%
2026 NA 25.7% 18.0% 15.4% Industry Median 11.2%
Annualized Growth -5.66% -6.13% -8.44% -20.28% BABA/Peers 13.22
Vs S&P 11.32

(Source: FactSet Research Terminal)

BABA’s profitability is expected to decline in the next few years, thanks to some of the most aggressive growth spending on earth. Yet still retain returns on capital, Joel Greenblatt’s gold standard proxy for quality and moatiness, that’s 13X its peers and 11X higher than the S&P 500.

BABA Growth Spending Consensus Forecast

Year SG&A (Selling, General, Administrative) R&D Capex Total Growth Spending Sales Growth Spending/Sales
2020 $11,044 $6,033 $6,596 $23,673 $71,376 33.17%
2021 $21,186 $8,868 $6,894 $36,948 $111,130 33.25%
2022 $26,834 $10,108 $8,995 $45,937 $142,645 32.20%
2023 $32,437 $12,143 $9,866 $54,446 $172,295 31.60%
2024 $39,554 $14,717 $12,375 $66,646 $206,562 32.26%
2025 NA $14,711 $12,134 NA $240,095 NA
2026 NA $16,145 $14,051 NA $271,655 NA
Annualized Growth 37.57% 17.83% 13.43% 29.53% 24.95% -0.69%

(Source: FactSet Research Terminal)

BABA’s growth spending is expected to grow at 30% annually through 2024. Does this sound like a company that’s dying? Or one whose exceptionally skilled management is very confident in its future.

BABA Tax Consensus Forecast

Year Operating Income Tax Costs Tax Rate
2020 $12,803 $2,879 22.49%
2021 $13,894 $4,536 32.65%
2022 $18,115 $5,090 28.10%
2023 $23,722 $6,494 27.38%
2024 $30,532 $7,442 24.37%
2025 $35,859 $9,572 26.69%
2026 $48,971 $12,351 25.22%
Annualized Growth 22.82% 31.15% 6.78%
Total Taxes 2020-2026 $48,364

(Source: FactSet Research Terminal)

Regulators are planning to hike BABA’s taxes, to about 25% by 2026 according to analysts. That means BABA is expected to pay nearly $50 billion in taxes by 2026. And that makes it a golden goose that Beijing likely doesn’t want to kill.

Reason Two: The Tech King Of China Has A Very Long Growth Runway

China has 1.5 billion people and in the next decade is expected to see its consumer class grow by 336 million people, more than live in the entire US.

Alibaba’s ecosystem is massive, with almost 1.2 billion people and growing rapidly. That includes 265 million foreign users that management says will hit 500 million in few years.

(Source: earnings presentation)

Within a decade, Alibaba could have over 750 million users outside of China, more than live in all of Europe.

(Source: earnings presentation)

Alibaba’s sales in the most recent quarter surged by 34%.

(Source: earnings presentation)

Every business saw double-digit growth including 54% sales growth in international operations and 50% in Cainiao logistics, which is the main way BABA is expanding into Europe.

Lazada recorded over 90% year-over-year order growth for the quarter, and Indonesia and Vietnam achieving the highest growth of over 100% year-over-year. AliExpress continued strong momentum in its major markets, such as Spain, France, and Russia, leveraging the improved cross-border logistic solutions in partnership with Cainiao.” – CEO, Q2 conference call

BABA isn’t just the Chinese Amazon, it’s taking on Amazon globally and aims to become a world-beater tech leader.

BABA Profit Growth Consensus Forecast

Year Sales Free Cash Flow EBITDA EBIT (Operating Income) Net Income
2020 $71,376 $18,634 $22,077 $12,803 $20,902
2021 $111,130 $25,717 $30,497 $13,894 $23,287
2022 $142,645 $25,320 $30,781 $18,115 $21,475
2023 $172,295 $30,606 $37,656 $23,722 $25,560
2024 $206,562 $35,288 $46,880 $30,532 $32,111
2025 $240,095 $41,521 $52,056 $35,859 $30,994
2026 $271,655 NA $69,951 $48,971 $41,807
Annualized Growth 2020-2026 24.95% 10.05% 21.19% 25.06% 12.25%

(Source: FactSet Research Terminal)

BABA’s smart strategic growth spending is expected to generate 25% annual sales growth and solidly double-digit bottom-line growth.

Metric 2020 Growth 2021 Growth Consensus 2022 Growth Consensus 2023 Growth Consensus 2024 Growth Consensus 2025 Growth Consensus
Sales 56% 28% 20% 19% 12% 20%
EPS 33% -7% 19% 21% 8% 22%
Owner Earnings (Buffett smoothed out FCF) -3% 162% NA NA NA NA
Operating Cash Flow 32% -4% 18% 12% NA NA
Free Cash Flow 32% -14% 15% 21% 24% NA
EBITDA 47% 1% 22% 18% NA NA
EBIT (operating income) -3% 30% 32% 35% NA NA

(Source: FAST Graphs, FactSet Research)

This is not what a dying company looks like.

BABA Dividend Consensus Forecast

Year Dividend Consensus EPS/Share Consensus Payout Ratio Retained (Post-Dividend) Earnings Flow Buyback Potential Debt Repayment Potential
2021 $0.00 $10.09 0.0% $27,425 7.19% 171.7%
2022 $0.10 $9.42 1.1% $25,332 6.64% 158.6%
2023 $0.12 $11.45 1.0% $30,795 8.07% 192.9%
2024 $0.01 $13.97 0.1% $37,943 9.94% 279.6%
2025 $0.00 $14.73 0.0% $40,036 10.49% 193.8%
2026 $0.00 $17.91 0.0% $48,679 12.76% 235.7%
Total 2021 Through 2026 $0.23 $77.57 0.3% $210,210.12 55.08% 1316.45%
Annualized Rate NA 10.04% NA 11.43% 11.43% 17.64%

(Source: FactSet Research Terminal)

Some analysts expect BABA to start paying a dividend in 2022 or 2023. Its $210 billion in retained consensus earnings could repay its debt 14X over or buy back up to 55% of shares at current valuations.

  • BABA has a $15 billion buyback authorization
  • increased from $10 billion the previous quarter
  • BABA’s buyback growth potential is double-digits

BABA Long-Term Growth Outlook

(Source: FactSet Research Terminal)

Currently, 59 out of 60 analysts covering BABA recommend buying it.

  • growth consensus range: 12.7% to 16.2% CAGR

Smoothing for outliers’ analyst margins of error are 10% to the downside and 20% to the upside.

  • 9% to 18% CAGR margin-of-error adjusted growth consensus range

(Source: FAST Graphs, FactSet Research)

BABA’s growth is expected to be slower than in the past, but could potentially accelerate in the future and could last for decades.

Reason Three: BABA Is Still A Buffett-Style “Fat Pitch” Blue-Chip Bargain

Alibaba’s lower 14.2% CAGR growth consensus is similar to the last three years, including the worst bear market in the company’s history.

In other words, as long as BABA keeps growing as analysts expect and assuming no significant increase in market sentiment, here’s what the company is worth today.

Metric Historical Fair Value Multiples (3-Years) 2021 2022 2023 2024 2025 12-Month Forward Fair Value
Earnings 26.04 $239.73 $284.61 $343.73 $384.87 $467.94
Owner Earnings (Buffett Smoothed Out FCF) 24.57 NA NA NA NA NA
Operating Cash Flow 20.02 $245.67 $288.73 $323.12 NA NA
Free Cash Flow 26.74 $219.11 $253.00 $313.13 NA NA
EBITDA 26.24 $288.76 $352.15 $416.17 NA NA
EBIT (Operating Income) 37.84 $244.14 $321.94 $433.27 NA NA
Average $245.52 $296.29 $359.49 $384.87 $467.94 $285.55
Current Price $166.78
Discount To Fair Value 32.07% 43.71% 53.61% 56.67% 64.36% 41.59%
Upside To Fair Value 47.21% 77.65% 115.55% 130.77% 180.57% 71.21%
2021 PE 2022 PE 2022 Weighted OCF 12-Month Forward OCF 12-Month Average Fair Value Forward PE Current Forward PE
$9.21 $10.93 $8.62 $10.57 27.0 15.8

During periods of 15% growth, BABA’s been valued at 26 to 31X by the billions of investors weighing the pros and cons of its business. We use the more conservative end of that range to estimate BABA is worth about 27X earnings as long as it grows as expected.

Today, it trades at 15.8X earnings and under 12X factoring in net cash on the balance sheet.

And I’m not the only analyst bullish on BABA. Out of 60 analysts that cover it on Wall Street, more than any other company on earth, 59 or 98% rate it a “buy”.

Analyst Median 12-Month Price Target Morningstar Fair Value Estimate
$243.70 $302 (DCF model = 28.8 PE)
Discount To Price Target (Not A Fair Value Estimate) Discount To Fair Value
31.56% 44.77%
Upside To Price Target Upside To Fair Value
46.12% 81.08%

Analysts expect BABA to return 46% over the next 12 months compared to the S&P 500’s 15%.

We don’t actually care about 12-month price targets, which never have any basis in our recommendations.

Time Frame (Years) Total Returns Explained By Fundamentals/Valuations
1 Day 0.02%
1 month 0.4%
3 month 1.25%
6 months 2.5%
1 5%
2 16%
3 25%
4 33%
5 41%
6 49%
7 57%
8 66%
9 74%
10 82%
11+ 90% to 91%

(Sources: DK S&P 500 Valuation And Total Return Potential Tool, JPMorgan, Bank of America, Princeton, RIA)

  • over 12 months luck is 20X as powerful as fundamentals
  • over 11+ years fundamentals are 11X as powerful as luck

What we care about is whether or not BABA fully compensates investors for its complex risk profile.

Rating Margin Of Safety For Speculative 10/13 Blue-Chip Quality Companies 2021 Price 2022 Price 12-Month Forward Fair Value
Potentially Reasonable Buy 0% $245.52 $296.29 $285.55
Potentially Good Buy 25% $184.14 $222.22 $214.16
Potentially Strong Buy 35% $159.59 $192.59 $185.61
Potentially Very Strong Buy 45% $101.28 $162.96 $157.05
Potentially Ultra-Value Buy 55% $110.48 $133.33 $128.50
Currently $166.78 32.07% 43.71% 41.59%
Upside To Fair Value (Not Including Dividends) 47.21% 77.65% 71.21%

For anyone comfortable with the risk profile, BABA is a potentially speculative strong fast-growth blue-chip opportunity.

BABA Investment Decision Score

Ticker baba DK Quality Rating 10 67% Investment Grade A+
Sector Consumer Discretionary Safety 4 77% Investment Score 100%
Industry Internet & Direct Marketing Retail Dependability 3 59% 5-Year Dividend Return 0.00%
Sub-Industry Internet & Direct Marketing Retail Business Model 3 Today’s 5+ Year Risk-Adjusted Expected Return 17.62%
Blue-Chip, Phoenix, Speculative
Goal Scores Scale Interpretation
Valuation 4 Strong Buy baba’s 41.59% discount to fair value earns it a 4-of-4 score for valuation timeliness
Preservation of Capital 7 Excellent baba’s credit rating of A+ implies a 0.60% chance of bankruptcy risk and earns it a 7-of-7 score for Preservation of Capital
Return of Capital N/A N/A N/A
Return on Capital 10 Exceptional baba’s 17.62% vs. the S&P’s 3.65% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score
Total Score 21 Max score of 21 S&P’s Score
Investment Score 100% Exceptional 73/100 = C(Market Average)
Investment Letter Grade A+

(Source: DK Automated Investment Decision Tool)

For anyone comfortable with its risk profile, BABA with a 5-year risk-adjusted expected return of nearly 18%, 5X that of the S&P 500, is as close to a perfect speculative hyper-growth blue-chip opportunity as exists on Wall Street.

Reason Four: Wonderful Return Potential

For context, here’s the return potential of the S&P 500 which JPMorgan estimate is 24% historically overvalued.

S&P 500 2023 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

S&P 500 2026 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

Aristocrats are expected to deliver about 9.4% CAGR returns over the next five years. Now take a look at BABA’s consensus return potential.

BABA 2023 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

BABA 2026 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

But what if BABA’s lack of a current dividend just doesn’t work for you?

Then consider the DK Zen Phoenix strategy.

  • Zen Phoenix: always buy growth with yield and yield with growth
  • always at fair value or better
  • and always focusing on safety and quality first and sound risk management always
  • balance in all things that matter

Combining BABA with an Ultra SWAN high-yield global aristocrat like British America can generate strong income while you wait for BABA’s bear market to end.

  • Daily Blue-Chip Deal Video: British American Tobacco Is The Best High-Yield Ultra SWAN Aristocrat You Can Buy Today
Company Yield Growth Consensus Long-Term Consensus Total Return Potential Weighting Weighted Yield Weighted Growth Weighted Total Return Potential
Alibaba 0.0% 14.20% 14.2% 50.00% 0.0% 7.1% 7.1%
British American Tobacco 8.3% 4.20% 12.5% 50.00% 4.2% 2.1% 6.3%
Total 8.3% 18.4% 26.7% 100.0% 4.2% 9.2% 13.4%

BABA combined with BTI yields a very safe 4.2% and offers 13.4% CAGR consensus long-term return potential, better than the Nasdaq, aristocrats, or S&P 500.

Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential
Safe Midstream 6.1% 6.2% 12.3%
BABA + BTI 4.2% 9.2% 13.4%
Safe Midstream + Growth 3.3% 8.5% 11.8%
REITs 3.0% 6.9% 9.9%
High-Yield 2.8% 11.2% 14.0%
CL, KMB, AOS, SWK 2.4% 8.9% 11.3%
Dividend Aristocrats 2.4% 8.9% 11.3%
Value 2.1% 11.9% 14.0%
60/40 Retirement Portfolio 1.8% 5.1% 6.9%
REITs + Growth 1.8% 8.9% 10.6%
High-Yield + Growth 1.7% 11.0% 12.7%
S&P 500 1.5% 8.5% 10.0%
Nasdaq (Growth) 0.5% 10.9% 11.4%

(Source: Morningstar, FactSet Research)

Risk Profile: Why Alibaba Isn’t Right For Everyone

There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

  • Daily Blue-Chip Deal Video: Alibaba, Earnings Prove This Hyper-Growth SWAN Is Still A Very Strong Buy
  • An even more thorough examination of BABA’s complex risk profile

BABA Risk Profile Summary

China’s e-commerce landscape has become increasingly competitive, with Pinduoduo registering faster GMV and user growth than Alibaba, and JD.com demonstrating its quality services amid COVID-19. Short video platforms and Tencent have also entered the e-commerce sector. The number of active buyers in the year ended December 2020 of Pinduoduo have already surpassed that of Alibaba.

The largest material ESG issue for Alibaba is its business ethics with regard to anti-competitive measures. It was fined CNY 18.2 billion in April 2021 for forcing merchants to choose its platform exclusively and required to curb its anticompetitive behavior. Financial regulators in China have continuously scrutinized online financial services and has led to the cancellation of its investee Ant Financial’s IPO. Alibaba has persistently faced the issue of counterfeit and infringing goods on its marketplaces. Hangzhou government’s assigning of representatives to work inside Alibaba also raise concerns of some investors, although there is no any evidence of consequence of value destruction for Alibaba.

Expansion into peripheral businesses might distract management, reduce profitability without materially improve Alibaba’s ecosystem. While we’re optimistic about Alibaba’s ability to become a preferred partner for international retailers and consumer brands looking to sell in China, the firm does not enjoy the same network effect and brand recognition in other countries, and it may face challenges directly expanding in these markets. Another ESG issue is corporate governance. In 2011, the company transferred the ownership of Alipay to a new company (now called Ant Financial, which is 33% owned by Alibaba) that is controlled by Ma, without the approval of key shareholders Yahoo and SoftBank.” – Morningstar (emphasis added)

The government can order state-owned enterprises to not use Alibaba’s cloud services.

Similar to the last quarter, the slower year-on-year revenue growth of Alibaba Cloud was primarily due to revenue decline from a top cloud customer in the Internet industry, which has stopped using our overseas cloud service due to local regulatory requirements. Excluding the revenue from this customer, Alibaba Cloud’s revenue growth this quarter would be close to 40% year-over-year.” – CEO, Q2 conference call

BABA’s Risk Profile Includes

  • VIE regulatory risk
  • domestic regulatory/political risk
  • highly competitive industries (large and well-capitalized rivals)
  • M&A execution risk (VC arm is frequently making investments)
  • talent retention risk
  • currency risk (as it expands overseas)
  • data security risk (hacking threat)
  • governance risk
  • China debt bubble risk (a Chinese Great Recession could significantly impact BABA’s business)

How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.

Material Financial ESG Risk Analysis: How Large Institutions Measure Total Risk

  • 4 Things You Need To Know To Profit From ESG Investing
  • What Investors Need To Know About Company Long-Term Risk Management (Video)

Here is a special report that outlines the most important aspects of understanding long-term ESG financial risks for your investments.

  • ESG is NOT “political or personal ethics based investing”
  • it’s total long-term risk management analysis

ESG is just normal risk by another name.” Simon MacMahon, head of ESG and corporate governance research, Sustainalytics” – Morningstar

ESG factors are taken into consideration, alongside all other credit factors, when we consider they are relevant to and have or may have a material influence on creditworthiness.” – S&P

S&P, Fitch, Moody’s, DBRS (Canadian rating agency), AMBest (insurance rating agency), R&I Credit Rating (Japanese rating agency), and the Japan Credit Rating Agency have been using ESG models in their credit ratings for decades.

  • credit and risk management ratings make up 38% of the DK safety and quality model
  • dividend/balance sheet/risk ratings make up 77% of the DK safety and quality model

Alibaba Long-Term Risk Management Consensus

Rating Agency Industry Percentile Rating Agency Classification
MSCI 37 Metric Model 32.0% BB Below Average
Morningstar/Sustainalytics 20 Metric Model 10.7% 28.2/100 Medium Risk
Reuters’/Refinitiv 500+ Metric Model 33.9% Satisfactory
S&P 1,000+ Metric Model 19.0% Poor
Consensus 23.9% Poor
FactSet Qualitative Assessment Below-Average Negative Trend

(Sources: MSCI, Morningstar, Reuters’, S&P, FactSet Research)

ESG investors should avoid BABA, though the good news is that there is significant room for improvement in the future.

 

(Source: Morningstar) – 20 metric model

  • 11th industry percentile
  • 48th percentile among over 14,000 globally rated companies

(Source: Reuters’/Refinitiv) – over 500 metric model

Reuters considers BABA’s risk management to be in the bottom 34% of its industry

BABA’s Long-Term Risk Management Is The 331st Best In The Master List (5th Percentile)

(Source: DK Master List)

If you’re an ESG focused investor you probably want to avoid BABA whose risk management consensus is similar to that of dividend champions and kings like LANC, FELE, BKH, and hyper-growth blue-chips like TTD.

How We Monitor BABA’s Risk Profile

  • 60 analysts
  • 3 credit rating agencies
  • 8 total risk rating agencies
  • 68 experts who collectively know this business better than anyone other than management

Rest assured that if BABA’s thesis weakens, strengthens, or breaks entirely, we’ll know about it, and adjust our recommendations accordingly.

Bottom Line: Alibaba Is Up 19% But Likely Set To Soar So Much More In The Coming Years

Alibaba has always been a volatile growth stock, and the worst bear market in its history has tried the patience of many investors.

All Chinese stocks are inherently speculative, especially China tech blue-chips like BABA, with its low but non-zero risk of possibly going to zero if VIE is ever revoked.

According to Rhodium Group, if China ever banned IPOs and eliminated VIE it would cost their tech industry $46 trillion in growth capital by 2030 alone.

This is why credit rating agencies, the Wall Street Journal, analysts, and most Chinese legal scholars don’t expect that to ever happen.

A few months back regulators confirmed no plans to eliminate either foreign IPOs or VIE. And since doing both would likely guarantee that China never competes with the west in future tech, that’s ultimately the reason I’m comfortable with my $135,000 investment into this classic-Buffett (and Charlie Munger) “fat pitch” investment.

Wait for a fat pitch and then swing for the fences…

When it’s raining gold reach for a bucket, not a thimble.”- Warren Buffett

I’m not a market timer, or a technical analyst, or a swing trader. I’m just a disciplined financial scientist who knows quality and a high margin of safety when I see it.

Yes, BABA’s thesis has weakened in recent months. Its growth consensus before the crackdown was 25% and its now fallen to 14.2%.

But from the best valuations in history, long-term investors comfortable with BABA’s complex risk profile, and who own it within a diversified and prudently risk-managed portfolio, can potentially earn Buffett-like 24% CAGR returns over the next five years, from this blue-chip bargain hiding in plain sight.

Author: Dividend Sensei, Seeking Alpha

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