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Alibaba: My largest investment. Here is why.

Opdateret: 5. feb.


Alibaba has experienced some challenging years, beginning with the cancellation of the Ant Group IPO, followed by a crackdown on Chinese tech companies in China. It has been followed up by geopolitical uncertainty as the relationship between the United States and China has deteriorated. They also experienced prolonged lockdowns in China compared to the rest of the world. Additionally, there are macroeconomic factors that have impacted the global economy. The question is whether all of this means that Alibaba is a wonderful company that can be bought at a wonderful price.


This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.


For full disclosure, I should mention that Alibaba is my largest position and has been for some time. I will strive to remain unbiased throughout the analysis, but it is important to note that a significant portion of my portfolio is invested in Alibaba. Furthermore, Alibaba is a massive company with a wide range of business operations. Hence, it will not be possible to delve into every aspect of their business, as the analysis would become excessively lengthy. So, if there are parts of Alibaba that you really like that I don't touch upon, I apologize in advance. You can buy Alibaba stocks in both Hong Kong and the United States. The United States' listed share is equivalent to eight Hong Kong shares. You can buy both Hong Kong shares and United States shares at eToro. eToro is a highly user-friendly platform that allows you to start your investment journey with as little as $50.



Alibaba is a Chinese multinational technology company. Alibaba was founded in 1999 by Jack Ma and 17 other individuals. It initially began as an online platform aimed at assisting Chinese small businesses and exporters in discovering global business prospects. It has grown to become a very large company, primarily known for its e-commerce operations, although it also has other types of businesses. The sheer number of businesses can make it overwhelming to comprehend the intricacies of each one, let alone write an analysis. However, Alibaba made it a bit easier when they decided to split the business into six different units in March 2023. The units referred to here are the Taobao Tmall Commerce Group, which is by far the largest group, generating approximately two-thirds of the revenue. It serves the domestic Chinese e-commerce market and is the only group that will be fully owned by Alibaba. The other five business units are: Cloud Intelligence Group, which includes their cloud computing group. Global Digital Commerce Group focuses on international commerce and includes Lazada and AliExpress. Local Services Group, which includes food and grocery delivery services such as Ele.me. Cainiao Smart Logistics is their logistics unit. And finally, the Digital Media and Entertainment Group includes Youku streaming services and their movie production. Some of these units will be spun off, such as Cainiao, which will have an IPO soon (Alibaba will still own 50% of the Cainiao shares). Cloud will also spin off, where current Alibaba investors will receive shares. Furthermore, Alibaba also owns assets in other companies, such as Ant Group. Alibaba is mostly known for Taobao and Tmall, which combined have more than 1 billion customers in China. Thus, with that number of customers, it is easy to determine that Alibaba has a strong brand moat.


Their CEO is Eddie Wu. He is one of the co-founders of Alibaba and has held various positions in the company until he became the CEO in September 2023. He has a degree in computer science from the College of Information Engineering at Zhejiang University of Technology. He is known for playing a key role in the development and monetization of both Taobao and Alipay (owned by Ant Group). Eddie Wu is still new as a CEO, so it is impossible to judge him based on his limited time. However, he has laid out two long-term goals for Alibaba: User first and AI-driven, and that he will adjust operations based on these two core strategies and reshape their business priorities in the future. He has particularly embraced AI and stated, "Over the next decade, the most significant catalyst for change will be the disruptions caused by AI in all sectors" and "If we fail to keep pace with the advancements of the AI era, we will be displaced." We don't know much about Eddie Wu, but he has delivered great results for Taobao and Alipay in the past. As a co-founder, he has a vested interest in seeing the business grow. I believe that his emphasis on the importance of AI will benefit Alibaba in the future. Thus, I am confident in Eddie Wu's ability to lead Alibaba's growth in the future.


I believe that Alibaba has a strong brand moat. I also hold the management in high regard and believe that they will drive the growth of Alibaba in the future. Now, let us examine the numbers to determine if Alibaba meets our criteria for a strong moat. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.


The first and most important number we will investigate is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all the numbers being above 10% for each year. Alibaba made its IPO in September 2014. Thus, the number from 2014 doesn't cover a full year since Alibaba ends their fiscal year by the end of March. ROIC has usually been good, consistently exceeding 10% every year, with the exception of fiscal years 2022 and 2023. These years were heavily impacted by COVID lockdowns in China, so I'm not overly concerned about the numbers from 2022 and 2023. It is also pleasing to observe a slight improvement in ROIC (Return on Invested Capital) in 2023, as the COVID lockdowns concluded by the end of the calendar year 2022. Nonetheless, I would like to see the return on invested capital (ROIC) being above 10% again in fiscal 2024.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. Alibaba is a textbook example because they have managed to increase their equity every year since their IPO. Despite the COVID lockdowns and other challenges mentioned in the introduction, Alibaba managed to achieve year-over-year growth in their equity in both 2022 and 2023. I find these numbers very encouraging.



Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow margin provides a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. It is the same pattern that we observed with the ROIC. Alibaba has historically delivered impressive financial results. However, fiscal year 2022 posed challenges for the company, as both the actual free cash flow numbers and the levered free cash flow margin declined. There has been some recovery in 2023 as the actual free cash flow numbers reached their second highest level ever, but the levered free cash flow margin is still below its historical numbers. On the other hand, the free cash flow yield is high, indicating that the shares are cheap. However, we will discuss this further in the analysis.



Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by current earnings. Having done the calculations on Alibaba, it shows that Alibaba can pay off their debt in 2,06 years. It is well below the requirement of 3 years, indicating that debt would not be a concern if I decide to invest in the company.



Like with all other companies, there are some risks associated with investing in Alibaba. One risk is competition. Alibaba's largest business unit, Taobao Tmall Commerce Group, is facing competition in China, particularly from PDD Holdings and JD.com. PDD has been gaining market share in 2023 and continues to grow rapidly. It has raised concerns that increasing competition will lead to price wars, which could negatively impact Alibaba's profit margins. Alibaba's management has previously stated that they have no intention nor need to participate in price wars. However, if PDD continues to grow and JD continues to lower their prices, they may not have a choice. The China risk. The China risk consists of various risks. One issue is geopolitics, as the relationship between China and the United States continues to deteriorate. This could have direct or indirect negative effects on China and Chinese companies. For instance, there are tariffs on Chinese goods and export restrictions on U.S. semiconductor companies. Another risk in China is regulations. We have seen China imposing many regulations over the past couple of years that were meant to limit the growth of the platform economy. And while there is currently no indication of any new regulations being implemented in the near future, investing in China still carries a certain level of risk. The final risk is the risk of delisting from the U.S. stock exchange. There are several ways in which Chinese stocks can be delisted and American investors can be banned from investing in Chinese companies. Thus, I will share them here. First, there are two executive orders issued by Donald Trump. The first one is titled "Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies." It doesn't seem plausible that a company such as Alibaba will fall under this executive order, as no e-commerce companies have made the list compiled by the U.S. Department of Defense. The second is "the executive order addressing the threat posed by applications and other software developed or controlled by Chinese companies." This is a significant threat, and it was this executive order that was used to blacklist Alipay. Nothing suggests that this executive order will be used, especially because it was issued by Donald Trump and not Joe Biden. However, to me, it represents the greatest risk originating from the U.S. Additionally, we have the "Holding Foreign Companies Accountable Act." The act means that the SEC can request to inspect audit papers for any company listed in the U.S. If SEC does not receive the audit papers within 3 years of their request, it will be delisted. However, the PCAOB has been in Hong Kong to inspect papers, and it seems like there is progress, even though it still isn't confirmed whether Chinese companies comply. Finally, we could also see China banning the "VIE structure," which would require Chinese companies to delist. However, nothing suggests that this is going to happen, as the CSRC has stated: "Companies with a VIE structure that meets the compliance requirements can go overseas for listing." It surely doesn't sound like they want to ban it anytime soon.


There are also plenty of reasons to invest in Alibaba. The first one is the restructuring of the company. In the restructuring plan, Alibaba will spin off several businesses. It should unlock value for investors because when multiple units are combined under a single entity, it can obscure the true value of these units and lead to a conglomerate discount in the eyes of investors. This is arguable what has happened with Alibaba. Some businesses that will be spun off include Cainiao, which is expected to reach a $1 billion valuation. Another business that will be spun off is their cloud business, and current shareholders will receive shares in it. The new company could fare well as the Chinese cloud market is expected to grow at a 37% compound annual growth rate (CAGR), compared to a 21% CAGR in the United States. Another reason is the recovery of the Chinese economy. Chinese officials have been vocal about how domestic consumption in China will drive GDP growth and help the country achieve its goals. And while we haven't seen a big stimulus splash as we saw in other countries, China has continuously taken small steps to stimulate the economy. Furthermore, Chinese consumers have significantly increased their savings during years of lockdown, resulting in record-high savings. This indicates that Chinese consumers have ample cash available for spending. Once Chinese consumers regain confidence, they will begin to spend their record-high savings. With Alibaba boasting 1 billion customers in China, the company is poised to capture a significant portion of this spending. Finally, we have the Ant Group IPO. The cancellation of the Ant Group IPO was what triggered the downturn for Alibaba. Thus, it is encouraging to see that Ant Group is rumored to IPO in 2024. Ant Group's valuation has significantly dropped from its initial $315 billion valuation prior to its IPO in 2020, and it is currently valued at around $78 billion. However, Ant Group has proposed repurchasing up to 7,6% of its shares prior to the IPO. Alibaba does not plan to sell any of its shares and still owns 33% of the company. The Ant Group IPO not only adds value to Alibaba, but it also signifies the relaxation of regulations, which is expected to enhance the sentiment towards Alibaba.



Now it is time to calculate the price of shares in Alibaba. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 4, which is from fiscal year 2023. I have selected a projected future EPS growth rate of 15%. (Finbox expects EPS to grow by 38%, but I use 15% as the highest rate.) Additionally, I have chosen a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on the fact that Alibaba has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $120,00. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Alibaba at a price of $60,00 (or lower, obviously) if we use the Margin of Safety price.


The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 29.086, and capital expenditures were 4.999. I attempted to review their annual report to determine the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 3.499 in our calculations. The tax provision was 2.264. We have 20.400 outstanding shares. Hence, the calculation will be as follows: (29.086 – 3.499 + 2.264) / 20.400 x 10 = $13,65 in Ten Cap price.


The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Alibaba's Free Cash Flow Per Share at $9,39 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $148,23.


I believe that Alibaba is a great company that has delivered a high return on invested capital (ROIC) when not affected by COVID lockdowns. We don't have much information about management, but I usually prefer it when founders or co-founders serve as CEOs. They are typically driven to grow the business. I also appreciate that the new CEO has been very vocal about prioritizing AI, as it has the potential to significantly impact businesses in the future. Investing in Alibaba or other Chinese stocks carries certain risks and may not be suitable for everyone. I'm not overly concerned about delisting because there is no indication that any of the executive orders will be used, and it doesn't seem like China has any interest in eliminating the VIE structure. Thus, it only leaves the Holding Foreign Companies Accountable Act, but I'm optimistic about its development. The risk associated with China is much greater, and although I do not anticipate any new regulations in the near future, geopolitical factors could negatively impact Chinese companies in the future. Competition is also increasing in China, but management seems confident that they can deal with it. The restructuring of Alibaba will unlock value for shareholders, and it is one of the reasons why I like Alibaba. Another reason is that I believe the Chinese economy will eventually recover, once the issues in the property sector are resolved. One thing to remember when looking at the calculations is that both the Margin of Safety and Ten Cap prices are calculated based on a very bad year for Alibaba. However, the Payback Time price seems to be more realistic as Alibaba managed to deliver its second-highest free cash flow ever in fiscal 2023. Thus, I believe that Alibaba is a good buy below the Payback time price of $148,23. If I didn't already have a full position, I would buy more as long as Alibaba trades below $100, which gives a significant discount to its intrinsic value.


I also write exclusive posts on Medium. If you want to read my posts, you can join Medium by clicking here. It costs $5 a month, but it will allow you to access all my posts as well as everything else on Medium, which is highly recommendable.


My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to increase my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.


I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.


Some of the greatest investors in the world believe in karma, and to receive, you will have to give. If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to the international tiger project. There are only few tigers back in Sumatra, and they need all the help they can get. If you have a little to spare, no matter how little, I would appreciate it if you would donate a little here. Thank you.



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8件のコメント


eduardo figueira
eduardo figueira
3月02日

You're most welcome, Glenn. Yes, Alibaba is my only investment. However, my goal is to evolve my portfolio to a fully invested one of 6 or 7 companies. I am waiting for prices to decline so I can buy the companies on my watchlist. This year is shaping up to be a very volatile year. Volatility creates opportunity!

いいね!
Glenn
3月03日
返信先

I don't have Instagram yet but I do have LinkedIn (even though I'm bad at updating it :D). You should be able to find me here: https://www.linkedin.com/in/glenn-eilsborg-jørgensen-71b04084/

いいね!

eduardofilipe
2月28日

This was a very good analysis, Glenn. I stumbled upon your website while doing research on BABA of which I am also a shareholder. In fact, BABA's investment case is so compelling, it's currently the only position in my investment portfolio. I also find it amazing that you, like me, use the same investment methodology applied by Phil Town. I always use it when assessing companies! For BABA, the platforms I checked (gurufocus included) project EPS growth rate of about 13% for the next 5 years. I am not sure how updated this article is, but Finbox seems far too optimistic in light of all that's been going on in China. That said, you did well in being conservative. I used 13% as…

いいね!
Glenn
2月28日
返信先

Hello Eduardo.


Thank you for your kind words and that you took your time to comment, I really appreciate it.


I'm happy that you found my website and that you found it helpful. Yes, it is always difficult to project how much EPS will grow moving forward. I also believe that 38% is unrealistic, and never use anything above 15%.


It takes courage to only own Alibaba in your portfolio but if it will perform as we both believe it will, it will end up being a very good call. I really hope that it works out for you.


Once again thank you for your comment.


Kind regards,

Glenn

いいね!
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