Robert Way
Over the last couple months, there have been a lot of things going on in the world, from midterms here in the US, to continued conflict in Ukraine and protests in China. I’m still underwater on my Alibaba (NYSE:BABA) investment, but the shares have had a nice run recently and are up over 30% in the last month. If you told me at the beginning of the year that the best one-month performance for Alibaba shares in 2022 would come at the same time as widespread protests in China due to the government’s zero-COVID policy, I probably would have laughed in your face. I normally focus on the company and its operations, but with Alibaba, I think it is prudent to keep an eye on current events in China.
COVID Protests
I have seen a lot of different videos and articles on what is going on in China, and I’m interested to see how it plays out. Here is a video I saw recently of a COVID quarantine camp in Lanzhou being burned down. I want to include a disclaimer that it’s hard to verify anything you see on social media related to the Chinese protests, so I would take what you see and hear with a grain of salt.
One of the main things that makes investors avoid Chinese companies is the Chinese government. I look at it as a risk, but I also separate the government and their tendencies from the business itself. Does the Chinese government have more influence than our government over its domestic companies? Yes, but I don’t think America is trending in the right direction on this front either. Is the Chinese government the single biggest risk to the bull case for any Chinese company? Also, yes. Do I think the Chinese government will do something rash like confiscate the assets of foreign investors? Highly unlikely, but it is possible.
Whether we like it or not, the Chinese economy is tied at the hip with the American economy, and I don’t think they will do anything that would cut off the inflow of capital from the West. This is a part of a complex calculated risk equation when it comes to Alibaba, and I wouldn’t recommend the stock to anyone who decides the risk/reward isn’t attractive for them. However, the valuation is still cheap today, even after the strong run in the last month.
Valuation & Q2 Financials
I’m going to keep this section short because I have hammered on these points in previous articles (if you want to read those thoughts, links are here, here, here, and here). The share price is different, but the arguments on the cheap nature of Alibaba’s stock still apply. The valuation today is still cheap at 11.7x earnings, so I think we will see some multiple expansion in the future.
The other thing that Alibaba benefits from is a balance sheet with plenty of cash and very little debt. This is another thing I have pointed out repeatedly, but the company had $67B in cash and short-term investments on the balance sheet at the end of the most recent quarter. While the growth isn’t as robust as past years, they still managed 3% consolidated YoY revenue growth. The Chinese commerce segment shrunk slightly (-1%), but the cloud segment grew a bit (4%) while the local consumer services and Cainiao posted more impressive numbers (21% and 36% growth, respectively). The company also reloaded its buyback program in Q3.
Buybacks
One of the benefits of having a balance sheet like Alibaba’s is the ability to buy back large amounts of stock. For the most recent quarter, they repurchased 24.3M ADRs for $2.1B. Not bad for a company with a current market cap of $232B. As of mid-November, the company had used $18B of the existing $25B authorization. They recently tacked another $15B onto the buyback and extended the authorization to last until March 2025. My guess is that the buybacks will keep coming at a decent clip, especially if the share price stays depressed.
Taiwan?
While headlines on a potential invasion of Taiwan pop up on a consistent basis, I think that it is unlikely that we will a hot war in the near future. I covered this in a recent article on Taiwan Semiconductor (TSM). A short summary is that I expect China to continue to play the long game and exert political influence over Taiwan. They are patient and I doubt they will overplay their hand when it comes to Taiwan.
Conclusion
I don’t have any plans to add to my Alibaba position currently for a couple of reasons. The first is that I don’t want to put any more money into Alibaba if I’m wrong about the government and their plans for foreign shareholders. I don’t think the government will do anything, which is why I’m still holding onto every share. If it turns out I’m wrong, I don’t want to throw any more good money after bad after the large price decline in shares.
The second is that there are several other companies in the market today that I find very attractive for new investments, and they have better risk/reward profiles in my opinion. I still think Alibaba will eventually trade at much higher prices, and it is still a large position in my concentrated portfolio. If I didn’t already have a position, I might be looking at buying Alibaba today, but I have smaller positions that I want to build into much larger positions in the next couple of months.
Alibaba isn’t for everyone. The risks due to government intervention, protests, and the constant headlines about a potential invasion of Taiwan make that crystal clear for everyone paying attention. However, the valuation is still cheap today at 11.7x earnings even after a nice run in the last month. The company has a rock-solid balance sheet, and the buyback program looks like it will reward patient shareholders over the next couple of years. I’m not buying and I’m not selling Alibaba, but I think the 33% run in the last month is a sign of things to come.
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