- Alibaba is entirely misunderstood by most investors. It is more an ecosystem than a company as I shall explain.
- Combine Amazon including AWS, ebay, Shopify, Netflix, PayPal, and JPMorgan into a single entity and then you have something similar to Alibaba.
- Not only does Alibaba have a very wide moat and durable earnings, but due to geopolitics, the entire Chinese tech sector is currently on sale in the market.
- Alibaba is a veritable bargain right now. Don’t take my word for it – Goldman Sachs, Deutsche Bank, Morningstar, and many others agree.
- Allow me to guide you to a better understanding of this wonderful opportunity.
Everyone knows the name Alibaba (NYSE:BABA), but very few actually appreciate what lies beneath the name. As an investor, until you appreciate what Alibaba has become, it is impossible to understand the investment opportunity that currently presents itself.
I’ll uncover the scale of Alibaba’s business and demonstrate how Alibaba went from being a copycat to becoming a market-leading innovator.
Alibaba is not without competition and it also faces different headwinds than its Western economy peers, but none of this undermines the investment thesis.
Alibaba is one of the most fascinating businesses in the world. By the end of this article, you’ll have a far better understanding of what it is and whether or not you wish to invest.
The first misconception people have is that they think of Alibaba as a Chinese version of Amazon (AMZN) or eBay (EBAY). It is neither an Amazon nor is it an eBay, although there were similarities in the early years as I shall explain.
The original business model was in fact monetized on advertising so some may argue that it was more like a Google (GOOGL)(GOOG) than an Amazon. This is a huge and critical distinction because advertising is very high-margin business – Facebook (FB) and Google can attest to that!
It is worthy of note that Amazon is now diversifying into other industries to supplement its e-commerce operations. Amazon’ Other unit, which is mostly ad revenue, is growing faster than the e-commerce giant’s retail, cloud, and Prime subscription businesses, according to FactSet data featured in a Financial Times profile. Amazon is expected to reach a 13% share in the high-margin advertising industry by 2022. So some may argue that it was not Alibaba that copied Amazon, but Amazon now taking the lead from Alibaba.
Alibaba was founded in 1997 (the year of Amazon’s IPO and a year before eBay’s IPO). It was established by Jack Ma and almost 20 other co-founders, as an online bulletin board that allowed small Chinese manufacturers to tell buyers around the world that they were open for business. Amazon, at that time, was merely an online bookseller, and so Alibaba did not copy Amazon.
eBay was a niche auction platform, and so Alibaba did not copy that concept either. Instead, Alibaba set out to become an agile ecosystem within which others would operate.
Alibaba is now the world’s largest online and mobile commerce company.
It is worthy of note that Alibaba’s evolutionary process has led Amazon and Alibaba down similar paths. Both companies operate in the cloud computing space. This is perfectly logical. Web services was once a huge cost for these online behemoths. However, by offering web services themselves they were able to turn a cost line on the income statement into a revenue line – genius!
Amazon’s backbone now seems to be Amazon Web Services (AWS) which despite generating only 12% of the total group revenue, represents approximately 63% of Amazon’s $14.5 billion in operating profit, such are the healthy margins in that business. Alibaba derives a similar financial benefit in China from its cloud offering.
In terms of scale, Alibaba is way bigger than Amazon. Allow me to give you a few stats to demonstrate the point. In 2015, Alibaba’s Gross Merchandise Volume (GMV) was USD $500 billion across its two main e-commerce properties Tmall and Taobao (note that this is the value of goods being transacted by customers on their platform). By 2020, they more than doubled that to USD $1.2 trillion and this is only e-commerce without all of its other revenue streams. Meanwhile, eBay’s GMV for Q1 2021 was $27 billion ($108 billion annualised) and in the 12 months to December 2020 Amazon produced total revenue on all lines of business of USD $386 billion.
More particularly by 2025 analysts expect Alibaba’s GMV to double again to USD $2.5 trillion. “Is this realistic?” I hear you ask.
Well, consider this. Alibaba accounts for close to 25% of all retail spending in China. Alibaba is the go-to place for every Chinese consumer who goes on the internet. Alibaba achieved a historic milestone of one billion annual active consumers globally in the fiscal year ended March 2021 (by comparison the entire population of the US is 328 million, so Alibaba’s active customer base is 3x every man, woman and child in the US).
Only 20% of its customers are outside of China and so the scope for future growth is enormous.
Each of its 1 billion+ customers on average bought something on Alibaba twice each week! This does not include groceries and food or other necessities. This is primarily discretionary spending.
Chinese GDP is still small per capita compared to American GDP but that will change over time. As the Chinese become richer they spend more, and the more they spend the more Alibaba benefits. There is still an awful lot of growth ahead if Alibaba maintains its current dominance in the Chinese market.
And this is only in discretionary spending, they have many other sources of revenue on top of this. The fact is that Alibaba touches the lives of so many people in so many different ways.
Consider a Chinese person having breakfast with food and groceries sourced from Freshippo, the Alibaba bricks and mortar offline food and grocery stores. Then catching up with the news by reading the South China Morning Post, a newspaper owned by Alibaba. Then they go online where Alibaba is the leading cloud provider in China via its subsidiary Aliyun and shop on the online mall Tmall which is, you guessed it, owned by Alibaba. They pay for things both online and offline using Alipay, the Alibaba payment company. The Chinese take care of their finances via Ant-Financial in which Alibaba has a 33% stake. And after a hard day’s work, they listen to streamed music on Alibaba’s Xiami which is similar to Spotify (NYSE:SPOT) or they watch streamed TV on Youku Tudou which is similar to Netflix (NASDAQ:NFLX) and also an Alibaba company. The fact is that Alibaba is omnipresent in Chinese society. It is entirely ubiquitous.
Consider the cloud hosting business. As Chinese businesses become more digitized moving to the cloud from traditional on-premises hosted solutions, Ali Cloud gets 40 to 50 cents on every incremental dollar spent! Just imagine the scale of that. How many new SAS companies are being built out of China? And who’s going to profit from all of that? It’s going to be Alibaba.
Daniel Zhang, Chairman and CEO of Alibaba Group Holdings
The cloud business is currently growing at north of 50% per annum. But here is the rub, investors are not including this enormous potential in the Alibaba valuation right now because investors do not understand the power of the cloud in China.
So far we have discussed the e-commerce business for consumers and the cloud business for enterprises. Next, you have the Ant Financial business to consider.
Ant-Financial is 33% owned by Alibaba. It evolved from its humble beginnings back in the early 2000s where it started life as Alipay, the escrow mechanism to facilitate payments on Alibaba platforms in much the same way that eBay used PayPal (PYPL).
There was no real closed-loop payment system in China until Alipay arrived (closed-loop refers to a situation in which the operator acquires both the customer and the merchant relationships, such as American Express (AXP) or PayPal. Contrast this with an open-loop network such as Visa or Mastercard which require issuing and acquiring banks in a five party transaction process).
So Alipay was the beginning of Ant-Financial.
Ant-Financial is likely going to be even bigger than Alibaba over time. Ant-Financial is effectively one of the two de-facto ways for every Chinese consumer to manage their financial lives. It is the biggest money market product in the world – way bigger than JPMorgan (JPM).
Ant-Financial has wealth management products. It has insurance products. It has lending products. While Alibaba has over 1 billion average active customers, Ant-Financial has even more! And don’t forget that Ant-Financial is 33% owned by Alibaba.
Now you are beginning to see that if you were to merge Amazon, including AWS, with eBay and PayPal and JPMorgan then you would have something that might come close to Alibaba!
The graphic below gives you an idea of the scale of Alibaba as a group.
Amazon could only dream of achieving what Alibaba has achieved. In fact, no US company even comes close to the kind of scale or stronghold that Alibaba has within the society in which it operates. Look at it another way, if Amazon disappeared tomorrow then, theoretically speaking, Microsoft and Google would fill the cloud space while Walmart, Target, and other e-commerce companies would fill the e-commerce void.
However, if Alibaba disappeared tomorrow then we need to consider the collapse of an entire ecosystem. It would systemically rock the entire Chinese economy.
When you think about Alibaba, don’t think on a large corporate scale, think country scale. Alibaba’s GMV is anticipated to hit $2.4 USD trillion by 2025 but is already $1.2 USD trillion.
Source: Wikipedia, Largest economies by nominal GDP in 2021
The table above demonstrates the largest 10 economies by GDP in 2021 which puts the numbers in context. By 2025 Alibaba’s GMV will be larger than the GDP of Italy, Canada, and Korea!
Indeed, the company has country-sized ambitions as the diagram below demonstrates.
Source: 2020 Alibaba Annual Report
Companies such as Alibaba, Tencent (OTCPK:TCEHY), SINA (SINA) and Baidu (BIDU) were the first to bridge what I call the old China and the new China.
There are new Chinese companies such as Meituan (OTCPK:MPNGF) (OTCPK:MPNGY) ByteDance (BDNCE) and Pinduoduo (PDD) where the CEOs were Western-educated, worked in western companies and adopted a Silicon Valley ethos.
But Jack Ma, founder of Alibaba, was an English teacher working in China and his path to success was entirely different. Jack Ma was a pioneer – a facilitator of change.
There can be no question that Jack Ma was inspired by the success of western companies such as eBay and wanted to replicate that success in China. Without any tech experience to draw upon himself he had to educate himself the hard way which meant watching, learning and to an extent replicating.
Ma could see what worked elsewhere and had no reason to believe that the same could not be achieved in China. So stage 1 in the Alibaba commercialisation path was a B2B marketplace offering called Taobao launched in 2003.
Then they needed to facilitate secure payments so along comes Alipay, the escrow mechanism for Taobao merchants which replicated what PayPal had achieved.
But Taobao was all about individual small transactions (similar to eBay). So they built Tmall in 2008 for branded business such as Nike (NYSE:NKE) and Adidas (OTCQX:ADDYY) together with local Chinese brands to create online shops. Now they had C2C and B2C offerings plus the payment mechanism.
Then they built Alibaba Cloud in 2009.
Now consider this. Alibaba did not own logistics. It was a very asset-light business that generated 65% plus EBITDA margins. The ethos in Alibaba was all about platform creation, take friction to zero, create collective good for everybody and let everybody benefit in the process. It essentially becomes an aggregator sitting on top of the ecosystem.
Subsequently, it layered on logistics and then SaaS applications. Then they layered on home goods and food and so on and so forth. This is how the ecosystem has evolved.
I use the word “evolved” because the business has not been pushed in any particular direction by design, but instead has been pulled in different directions out of necessity. The ethos really is to reduce friction to the maximum degree, to allow everybody to enter the ecosystem and then to continue mitigating any frictional drag by layering on new services to grease the cogs of the machine.
This makes Alibaba very difficult to understand or value looking from the outside in. There is no Western economy equivalent to model it against. Comparing it to Amazon is pure folly.
It doesn’t make sense to so many Western investors because it breaks every rule of the way Western companies operate. The truth is that the Western approach simply would never have worked in China, and the Chinese approach would probably not have worked anywhere other than China.
So Alibaba ought to be considered an ecosystem rather than a company – this is certainly how it views itself.
92% of Chinese people live in either rural locations or lower-tier cities, the 700 plus cities in China that most people have never heard of. If you had to build all the infrastructure needed to be an Amazon in China, this means building warehouses, managing logistics and supply chains then this would be way too capital intensive to achieve. But if you created a network of local suppliers and connected them up via logic and software, which was exactly what the Alibaba Cainiao network did, well, then you have something.
Now you have a network effect working in your favour. As new merchants come online they go to Alibaba first to sell their wares. Now you have a flywheel which allows your business to grow rapidly.
This was the pivot point in the Alibaba evolution. Alibaba begins life copying other successful businesses, but now it has a model that is being copied by others.
Think Shopify (SHOP) for example. Shopify gives businesses the chance to build their own virtual storefront online and provides the tools to make the business as successful as possible. Alibaba did this first with Tmall.
What does Shopify do next? It creates Shopify Pay because it wants its own internal ecosystem to allow transactions to be secure between merchants and consumers. That looks a lot like Alipay to me.
Now, Shopify is building up third-party warehouses, which sounds a lot like Cainiao to me.
So Alibaba the copier has become Alibaba the innovator. As I have now demonstrated Alibaba is now being copied by Western businesses! Fancy that!
All of this leads us to conclude that a company may begin life as a pure digital business but that scale requires it to build out a full-stack solution. A vertically integrated enterprise. Amazon, Shopify, and Alibaba all followed a similar path in this regard.
BABA’s Competition in China
It is now useful to compare Alibaba to JD (JD), another very successful Chinese company which began its life a few years after Alibaba.
JD is very different to Alibaba because it is capital intensive and owns its own logistics infrastructure. The capital intensity of the business meant that JD had to focus on products with a high average order value (AOV), typically electronics and apparel, with bigger margins in order to make the model work, but owning the logistics gave it unprecedented delivery speeds which enabled it to compete in a new way. This created a challenge for Alibaba. How could Alibaba’s Cainiao network, with a hodgepodge collection of thousands of logistics suppliers, promise two to three-day delivery in order to compete with JD?
Alibaba needed a solution. They knew that each logistic supplier may take many days to deliver door-to-door, but that each supplier could deliver city to city far more quickly. So the solution was to bifurcate the delivery process. First was the movement of goods between major hubs and second was the utilisation of other local means to distribute from each hub for final mile delivery. So Alibaba built a software layer on top of all these third-party logistics operators to enable faster delivery, albeit in multiple stages. Did Amazon not replicate this final mile methodology?
Alibaba went further and took an equity stake in each logistics company in order to exert an element of soft control over them.
What is amazing about Alibaba is that because it grew up in an environment of frugality where nothing was given to them, they always had to hack their way to scale with an asset-light methodology. The result is a capital-light, very high margin business operating at unprecedented scale today.
So in China today there are three major e-commerce players:
- JD.com, which is backed by Tencent Holdings, is a capital-intensive vertically integrated operator and in that regard, it is the most Amazon-like business. However, I would argue that when it comes to a technology backbone and technology infrastructure, they aren’t even close to Amazon. JD just wanted to focus on the bigger cities. It decided to build full logistics. It wanted to stand for trust and quality. It knew that its gross margins were going to be lower and cyclical in nature. It needed to focus on higher-margin products to make the model work which meant that its scale of users will always be lower than Alibaba. It can therefore be seen that JD is a different animal to Alibaba and certainly not a real competitive threat.
- Alibaba is unique. It is capital-light and technologically superior to JD. This allows it to benefit from higher margins and far greater scale. It is growing both organically and by acquisition. In fact, Alibaba is in the process of concluding a deal to add to the 20% stake that it already owns in Suning.com Co. Valued at $8 billion it is one of China’s biggest retailers of appliances, electronic and other consumer goods. This deal will enable Alibaba to encroach on top rival JD which has historically had a stronghold in electronics. The strategic value of Suning’s stores, distribution centres and last-mile delivery stations to Alibaba is clear. It has a goal of building an empire where both offline and online shopping is seamlessly integrated. Of particular note is that the deal to buy Suning.com Co. is being made by a consortium led by Alibaba and the Jiangsu provincial government. This demonstrates how intertwined Alibaba is with the political and economic infrastructure of the PRC. Of particular note is that Suning owns hypermarkets and has the fifth-largest share in that space at 4.4% according to 2020 data from Euromonitor International. Guess who is at the top of the leader board in the hypermarket space – yes, Alibaba via its Sun Art Retail Group (OTCPK:SURRY) which holds 13.7%. Consolidating the market shares of Suning and Alibaba will pose a challenge to other players in the market including Walmart’s Chinese operation, currently in fourth place with a 9.3% market share (of note is that Walmart has a tie-up with JD in relation to online operations).
- Pinduoduo (PDD) is a newer version of Alibaba, equally aggressive, very innovative, and technologically astute. It shaved prices to the bone in a manner not too dissimilar to Costco (COST), albeit without the bricks and mortar real estate and without the membership fees. So how did they finance those low prices? The hack that they used was that they procured supply of goods directly from the manufacturer or producer. Pinduoduo knew that there are multiple layers of middlemen in China: wholesalers, city distributors, county distributors, etc. Well, what if you collapse all that? You get your prices much lower but you have to deal with suppliers wanting to move large volumes. What sets Pinduoduo apart from China’s other e-commerce giants, such as Alibaba and JD.com, is that it cleverly utilises social media. Buyers put details of products on sites like WeChat – China’s answer to WhatsApp with 1.2 billion users – to get friends and family to buy as a group. The bigger the group, the bigger the discounts available. In this way, Pinduoduo turns the shopping experience into a sort of fun game-like social activity and effectively outsources much of their marketing to their customers. Consider that shopping in a mall is a social experience. PDD is reintroducing the social element into e-commerce. It is continually looking for ways to make online shopping fun. Explaining his vision for the company before its flotation on the Nasdaq, the company’s founder and CEO Colin Huang Zheng said Pinduoduo was a mixture of “Costco and Disneyland” that combined bargain products with entertainment.
So, the question to ask is how does a Pinduoduo emerge under the shadow of Alibaba?
Well, in 2015 Alibaba had an 80% market share of all e-commerce in China. That is simply unsustainable. Consumers like variety, they like choice, they like to try something new. More particularly suppliers like to use multiple sales channels. As such, 80% was always going to be eroded.
By comparison, in America, even Walmart at its peak had only 15% of the market share. Amazon loses market share to Wayfair (W), and other companies growing even faster than Amazon. It doesn’t mean Amazon is losing relevance. The same is true for Alibaba.
So, looking at market share on a stand-alone basis, in my opinion, is not the right way to look at e-commerce companies. It’s about how many incremental dollars they are able to collect, it’s about efficiency, and it’s about earning power.
All said and done, competition is great for driving efficiency and profitability. In China, these waves of competitors keep coming, so the incumbents can never rest. The Chinese mentality is one of no retreat and no surrender. Everyone in China strives to do their best, especially when the going gets tough. Obstacles or inconveniences don’t deter them – they just find a way around it. They come up with alternate methods to achieve their goals. The Chinese have a phrase for it – cha bu duo, where the focus is less on process and rules and more on the result. In China the mindset is encapsulated by the proverb shìshàng wú nánshì, which translates to “nothing is impossible to a willing mind”. In short, when working for a company in China the mentality of people is very different to working for a company elsewhere in the world. There is a feeling of camaraderie almost like belonging to a sports team. In the US each individual tries to outperform his friends and neighbours and demonstrates success by showing off wealth with material possessions. In China it is different. It is not about the individual, instead, it is about the team that you belong to prevailing over the competition. It is all about triumph and winning as a team. So if you belong to team Alibaba, you are prepared to work long and hard with your colleagues in order to prevail over team Pinduoduo or team JD. While this is difficult for westerners to understand, as an investor it is important to understand it.
One small caveat
It should be noted that Alibaba was fined a whopping $2.8 billion in the March quarter of this year pursuant to an anti-trust monopoly infringement and that resulted in Alibaba making its first quarterly loss in over 9 years. Alibaba has accepted the slap on the wrist and vowed to learn from this experience. However, the earnings figures for this year will be impacted by the magnitude of this fine and so this will skew all the TTM valuation metrics such as PE multiples, net profit margins and profitability metrics such as ROE and ROC.
An investor must see these events as a historic blip which will not be repeated and so ought to be disregarded when evaluating Alibaba as an investment from today. Forward earnings will undoubtedly be far stronger.
Investors also ought to be aware that within the Alibaba group other transitional changes are afoot. For example, Ant Group Co., the fin-tech arm, is undergoing a state-ordered transition into a financial holding company that will be regulated more like a bank. Is this a bad thing? Or does it indicate that the formidable Alibaba group is becoming so large with tentacles in so many industries that it is now officially recognised as being in the profitable banking sector also?
Should You Buy Alibaba Stock?
First, you may wonder why I invest in Alibaba and not in the likes of newcomer Pinduoduo. Well, the answer is simple. I distinguish Alibaba on the basis that it has demonstrated that it is able to generate durable earnings with impressive growth for its shareholders. This is a prerequisite for me when it comes to selecting investments (I have learned a great deal from masters such as Buffett in this regard). By contrast, Pinduoduo has not demonstrated that it is able to generate durable earnings. Instead, Pinduoduo regularly offers customers cash subsidies in order to offer large discounts which it then records as sales and marketing fees. As a result, the company has never even come close to making a profit because its operating costs far exceed its gross profits. Said differently, very much like Singapore’s Sea (SE), it pays dearly for its impressive revenue numbers and if it stopped paying it is not clear what would happen to the business. More particuarly, to date, Pinduoduo has pulled in $5bn from investors in four separate rounds of fundraising, including its IPO. I like companies that are able to generate money for their shareholders and to grow organically, not companies that need shareholders to continually prop them up with new capital.
Second, you may wonder why I am so bullish about Alibaba at the moment. There is a multitude of reasons.
I have already set out how formidable Alibaba is as a company. Said differently, it has one hell of a moat.
June Quarter earnings are due for release in August and the Street is downbeat about the company forecasting that revenues will only grow by 37% year over year! Really? Most companies would dream of 37% top line growth. For me, I see this as a huge positive. If 37% is a bad year then that suggests that the rate at which analysts expect the company to grow in normal to good years is far higher. So if 37% is baseline growth, what’s not to like?
I look out for this type of clue when analysing companies. There are several others that I could point to at the moment for Alibaba.
Data by YCharts
The chart above demonstrates that, with the exception of the blip caused by the global pandemic, free cash flow generation powers from strength to strength. Over time the valuation of the company, here shown by the share price, tracks free cash flow. So now, look at the share price now relative to the free cash flow and ask yourself where it goes next. In fact, the gap between free cash flow and price has never been wider which to me indicates a market inefficiency that requires exploiting by intelligent investors.
It is also worthy of note that between 2014 and 2021 revenue has grown at a CAGR of 41.4%, EBITDA has grown at a CAGR of 23.4% while the enterprise value of Alibaba has only expanded at a CAGR 13.9% (and the market cap at 14.7%). This too indicates that price is trailing intrinsic value by quite some margin. It is worthy of note that this anomaly in pricing is a recent development with the share price dipping substantially over the past 9 months (see the chart below which shows how there has been a short-term dislocation between the share price and fundamentals. Said differently, the top line growth is accelerating while the share price has pulled back. If you observe how closely the share price tracks the revenue curve over the longer term it is clear that the share price needs to move up by 50% in order to return to the long term trend).
Data by YCharts
As a result, Alibaba shares are currently on sale in the market – imagine a big red sign stating -40% in the shop window because that’s what we are looking at here.
Next, consider capital allocation, the most important job of the management of any company. In my mind, there is a logical waterfall approach that hinges around opportunity costs. If there is opportunity to reinvest in growth at good returns on capital then that is the optimal choice and as much money should be allocated to this option as is feasible. In the absence of good reinvestment opportunities, a company ought to consider whether its shares are trading at a discount to intrinsic value. If so a repurchase of shares is accretive to shareholder value. In the absence of viable reinvestment or repurchase opportunities, the company may decide to either retain cash for future deployment or else as a last resort, to pay out dividends. I personally don’t like dividends because they are tax-inefficient (they are taken from net earnings that have already been taxed at corporate level and then taxed again as income when received by the shareholder, then they are subject to transaction fees when being reinvested – but that is a discussion for another article). This is why the best growth companies such as Berkshire Hathaway (BRK.A) and Amazon don’t pay dividends – they never get to the bottom of the waterfall of options because there are always better options available. Companies that pay dividends are most commonly those companies with little or no growth opportunity – think Exxon Mobil (NYSE:XOM) as an example, because the world is moving away from its reliance on oil. In any event, against this backdrop, consider this bottom-up analysis in respect of Alibaba:
- It does not pay dividends. This is great as it means that there are better options available to the management in relation to allocation of capital.
- In May 2019, Alibaba’s board of directors authorized a share repurchase program for an amount of up to US$6 billion over a period of two years. As of the date of this article it had only repurchased shares with a value of $371 million. This is also great because despite the shares trading at a substantial discount to intrinsic value, the management has concluded that there are still better uses for its corporate capital than repurchases.
- When announcing its March quarter and Full Fiscal Year 2021 Results, Maggie Wu, Chief Financial Officer of Alibaba Group stated, “We surpassed our annual revenue guidance in fiscal year 2021 by achieving strong organic revenue growth of 32% excluding the consolidation of the newly-acquired Sun Art. This was driven by robust performance of our core commerce businesses as well as continued growth of Alibaba Cloud. Our adjusted EBITDA grew 25% year-over-year while we increased investments in new businesses and key strategic growth areas. Given the market potential and our proven profit and cash flow generation capabilities, we plan to use all of our incremental profits and additional capital in fiscal year 2022 to support our merchants and invest into new businesses and key strategic areas that will help us increase consumer wallet share and penetrate into new addressable markets.” This confirms that the business is reinvesting wisely for future growth. Any shareholder ought to be happy with a tax-deductible reinvestment of a dollar today if that same dollar will be worth significantly more than a dollar tomorrow.
Companies with wide moats and strong growth prospects are usually priced at a significant premium in the market, but here is the great part – Alibaba is currently selling at a discount. The discount has nothing to do with Alibaba specifically, it is the entire Chinese tech sector that has been in the doldrums in recent months because of regulatory concerns in the PRC. As such, the stars are perfectly aligned. Here we have a wonderful company offered at a discounted price.
My calculations, which are beyond the scope of this already very long article, suggest that Alibaba is trading at approximately 60c on every dollar of intrinsic value. It is encouraging that Chelsey Tam, senior analyst at Morningstar, agrees with me as she recently suggested fair value of $313 on BABA (currently trading at about $211)
Chelsey Tam and I are not alone. Deutsche Bank has a $281 price target, Jefferies $336 and Goldman Sachs $330. In fact, the average target on the Street is $290.82.
This article is pretty large but I have really only just scratched the surface in relation to Alibaba. I have not, for example, provided any commentary on the progress being made by Alibaba outside of China which itself is a huge growth opportunity. However, I hope that I have helped you to gain a better understanding of what Alibaba is and why it ought to be considered for your portfolio for the long term.
If you are truly seeking alpha for your portfolio, I would suggest that you will struggle to find a better opportunity than this.
Author: James Emanuel, Seeking Alpha