Alibaba: Blood On The Street

Summary

• Alibaba is marching relentlessly to its all-time lows.
• I offer 3 elements for shareholders to keep in mind.
• Plus, 1 practical investment insight.
• BABA stock is priced at 10x this year’s non-GAAP EPS. How investors should think about this valuation.
• Investors are not only fully disregarding Alibaba’s growth prospects. Today, investors are essentially saying that Alibaba only has 10 years left of operations.

Investment Thesis

Alibaba has been left for dead. There’s really no hope left in its share price. The fears of delisting have come and gone. And now, investors have moved onto fears that China will have no near-term economic growth prospects, as it endlessly embraces Covid lockdowns.

Simply put, investing in China has become a blur of all too aware risks. Investors have nearly unanimously moved to one side of the boat.

And it makes sense, institutional capital will in no way look to open a position in Alibaba now as 2022 comes to a close. There’s simply no point for any capital to chase the stock at this point and to add even more risk to a portfolio that is more likely than not in the red in 2022.

Furthermore, as we are now in the throngs of tax loss season, that’s yet another aspect that’s weighing down the stock.

With all that in mind, let’s get to it.

Eyeing Up the Obvious, All-Time Lows

Everything you thought you know, all your resilience is getting tested with Alibaba’s share price sliding more than 70% from its highs set two years ago.

You did everything right, you didn’t overpay for the stock, and you followed Charlie Munger’s footsteps, and yet, the stock continues to create such a horrendous amount of pain.

I fully get that. And I recognize that it’s nearly impossible to have a positive outlook when the stock looks intent on retracing its all-time lows set approximately 7 years ago.

Thus, at this point, I believe it could be helpful to provide 3 practical insights.

Top 3 Elements to Remember

It doesn’t matter the price you paid. That is not reflective of anything. There’s no point in price anchoring and looking back and thinking when will the stock return to breakeven.

Secondly, we suffer substantially more pain from a loss than the pleasure we derive from a gain. I follow a lot of stocks, and I recognize that there are times when things simply don’t make sense. Ben Graham would call it Mr. Market. And that’s the thing with investing, there are long periods of time where things don’t make sense. But that’s ok.

Third, negativity sells a lot better than hope. And when there’s just so much geopolitical tension in all investors’ conversations, it’s all too easy to become overwhelmed and believe the worst. There are always ”problems with the China relationship”.

Indeed, while the West has now fully opened up post-Covid, China continues to embrace lockdown policies. All the while, this is ravaging China’s economy and is clearly detrimental to the business environment.

I’m not trying to offer you a message of hope. I’m simply telling you the facts as they are. Next, let’s turn to practical investment insight.

Practical Investment Insight

As difficult as it may seem to believe, time is a wonderful healer. It’s such a cliche in investing to say that this too shall pass that it feels trite to even mention it.

We all sit down and read value investing book after value investing book. We all know the theories of what we should do, but when it comes to putting those insights into practice, we often struggle.

This is the point I’m making, there’s a period of maximum pain. And Alibaba is now in this period.

Investors have long ago passed the point of dismissal and denial. Indeed, I believe that we are probably past fear too, and into panic mode by now.

That means as Alibaba shareholders you’ve already embraced nearly all the potential downside that this investment can bring.

In other words, the risk-reward here is now positive.

BABA Stock Valuation – Pointless Exercise

I could tell you that Alibaba is priced around 10x this year’s non-GAAP EPS figures, but I don’t believe that’s particularly instructive. Why?

Because I told you that Alibaba was priced at 11x this year’s non-GAAP EPS just a month ago, only to see Alibaba’s stock slide a further 10%.

It’s now got to the point that valuations are practically worthless. What the market is now saying is that Alibaba only has approximately 10x years’ worth of earnings left in the tank, with whatever Alibaba makes after 2032 is the equivalent of free upside.

The Bottom Line

Buy when there’s blood in the streets, even if the blood is your own (Nathan Rothschild)

During the snap bear market of 2020, I remember countless investors arguing about how things were obviously cheap and they wished that they had acted more decisively in that period. And of course, in hindsight, it’s really easy to pick the bottom.

But the problem with investing is that nobody rings a bell at the bottom to say, ”hey, this is the point of maximum pessimism”.

Accordingly, there’s every valid reason why this investment should not work now being priced in. But to me, there are too few tangible considerations for why this investment should work out.

Let me shine a light on one final consideration. Alibaba’s China Commerce unit makes about $24 billion as a run rate of adjusted EBITDA.

That puts the whole of Alibaba at less than 8x its China Commerce adjusted EBITDA, with Alibaba’s Cloud business, DingTalk, its communication and collaboration platform, plus Alibaba’s logistics business coming for free. To make no mention of Alibaba’s International commerce business.

Yes, there are reasons to be put off from investing in Alibaba, some areas of its business are still unprofitable. And time horizons have dramatically shrunk and very few investors are now going to bother to throw good capital after bad capital. After all, there’s just too much blood on the street here. So is now the best time to give up?

Author: Michael Wiggins De Oliveira, Seeking Alpha