BABA - Alibaba

[alertmeipp]

Do you guys realize there will be more Chinese tech IPOs coming to US?

Not like all China companies will be delisted.

 

Why would one sell at near 52 weeks low when the company is doing so well?

 

 

 

[LearningMachine]

In this May 19, 2021 discussion, Daniel Zhang made some rational points about

• prioritizing development by employees over acquisition, if everything else is equal
• differences in cloud adoption in China vs. migration to cloud in the U.S.
• biotech as a potential future growth industry (albeit, the future that everyone has been predicting for over 30 years to be in the next 10 years, just like electric car used to be :-)).

 

 

 

Edited June 13, 2021 by LearningMachine

[Xerxes]

On 6/12/2021 at 10:44 AM, alertmeipp said:

Do you guys realize there will be more Chinese tech IPOs coming to US?

Not like all China companies will be delisted.

 

Why would one sell at near 52 weeks low when the company is doing so well?

 

 

 

 

Don't know about others, but as I said earlier I have been holding since 2014 (with shares as low $67 USD when it dipped IIRC). At the end there is a portfolio to manage and if one is restricted from adding new money in RRSP, one needs to liquidate something. That was easily the weakest link for me from my point of view.

 

If folks believe that Alibaba is dirt cheap (which it is based on free cash flow yield basis), than all they have to do is to buy it from Hong Kong. What's wrong with that ?

 

De-listing in of itself is not a problem. You still have ownership, but you need to be willing to do the legwork if your broker is not running a brokerage business in outside Norther American market.

 

I am looking to open an account with HSBC and/or perhaps IBKR to be able to get access to Tokyo, Hong Kong, London and Euronext. Perhaps I will at a later date liquidate my Tencent position (pink sheet) as well and by it direct.

 

I happen to think that a gentleman never buys pink-sheet, only direct holdings.

 

[LearningMachine]

34 minutes ago, Xerxes said:

If folks believe that Alibaba is dirt cheap (which it is based on free cash flow yield basis)...

 

 

@Xerxes, thanks for sharing your thoughts.  Would it be possible to share your math on how you think Alibaba is dirt cheap on free cash flow yield basis?  

[Xerxes]

The math I am afraid is high school math, so I was able to pull it off.

 

I think just comparing Alibaba ~+$20 billion or so FCF to Amazon's slightly higher number ~$30 billion and vs. their respective market capitalization. 

 

Perhaps a flawed approach and not same type of companies, but just as a yardstick.

[LearningMachine]

3 hours ago, Xerxes said:

The math I am afraid is high school math, so I was able to pull it off.

 

I think just comparing Alibaba ~+$20 billion or so FCF to Amazon's slightly higher number ~$30 billion and vs. their respective market capitalization. 

 

Perhaps a flawed approach and not same type of companies, but just as a yardstick.

 

Thanks @Xerxes for clarifying you meant dirt-cheap when comparing to Amazon.

 

Let's say we believe Alibaba's numbers and don't take any discount for VIE structure or for being in a jurisdiction that doesn't punish for making false statements to shareholders and doesn't punish for stripping any assets. 

 

Then, their FCF of ~+$20 billion against market cap of $573.78B computes to FCF yield of 3.5%.

 

Let's compare them to another company here, e.g. VZ with 2020 FCF of $23.6B against market cap of $237.35B, which computes to FCF yield of 9.9%, that is 2.83 times Alibaba's FCF yield.  That makes BABA 2.83 times expensive for equivalent FCF yield from VZ when comparing just FCF without taking growth into account. 

 

Taking growth into account: 

If despite public promises to spend any incremental income back on merchants, Alibaba could grow FCF at 15% year, in 5 years, they would only double the FCF.

 

If in those five years, VZ grows FCF only by 5%, they will grow FCF by 27.6%, i.e. FCF yield of 12.63%, i.e. 3.61 times Alibaba's current FCF yield.

 

Alibaba would have to grow FCF at 29.3% per year for five years without any hiccups to grow FCF by 3.61 times to $72.2B. 

 

What do you think is the probability of that happening given their public promises?   

 

I haven't included above that for holding VZ you're getting paid a 4.38% yield while not getting paid anything for holding BABA.

Edited June 14, 2021 by LearningMachine

[skanjete]

@Learningmachine : Maybe you also could take into account the debt situation at VZ and the investment assets at BABA, both of which have little impact on FCF, but a major impact on the valuation of the companies. 

[LearningMachine]

8 hours ago, skanjete said:

@Learningmachine : Maybe you also could take into account the debt situation at VZ and the investment assets at BABA, both of which have little impact on FCF, but a major impact on the valuation of the companies. 

@skanjete, I agree we have to take debt and investment assets into account as well. 

 

I was just trying to go along with @Xerxes's way of valuing based on FCF to say that BABA is not dirt cheap but very expensive compared to VZ, when compared using FCF. 

 

 

 

Edited June 14, 2021 by LearningMachine

[Gregmal]

They're two totally different investments. For growth, I think its best imbedded in an observation of the 1/3/5 year performance. VZ has largely been a turd bond alternative only recently made popular because Buffett bought it. BABA has been growing like a weed and now popular because Munger bought it. But the investment case really comes down to one thing...and that is, does the Chinese or US government impair the company's ability to operate? If yes, this is probably a mediocre investment, if no, its going to be a home run. 

[Xerxes]

13 hours ago, LearningMachine said:

 

Thanks @Xerxes for clarifying you meant dirt-cheap when comparing to Amazon.

 

Let's say we believe Alibaba's numbers and don't take any discount for VIE structure or for being in a jurisdiction that doesn't punish for making false statements to shareholders and doesn't punish for stripping any assets. 

 

Then, their FCF of ~+$20 billion against market cap of $573.78B computes to FCF yield of 3.5%.

 

Let's compare them to another company here, e.g. VZ with 2020 FCF of $23.6B against market cap of $237.35B, which computes to FCF yield of 9.9%, that is 2.83 times Alibaba's FCF yield.  That makes BABA 2.83 times expensive for equivalent FCF yield from VZ when comparing just FCF without taking growth into account. 

 

Taking growth into account: 

If despite public promises to spend any incremental income back on merchants, Alibaba could grow FCF at 15% year, in 5 years, they would only double the FCF.

 

If in those five years, VZ grows FCF only by 5%, they will grow FCF by 27.6%, i.e. FCF yield of 12.63%, i.e. 3.61 times Alibaba's current FCF yield.

 

Alibaba would have to grow FCF at 29.3% per year for five years without any hiccups to grow FCF by 3.61 times to $72.2B. 

 

What do you think is the probability of that happening given their public promises?   

 

I haven't included above that for holding VZ you're getting paid a 4.38% yield while not getting paid anything for holding BABA.

 

Correct, when compared to the Apex predator: Amazon.

 

I think from asset allocation point of view, unless one is fully agnostic on the industry and just looking for value, the base comparison is always compared to likeable names. I am not a super star investor, therefore, my view is that I need to have at least 25% allocation to Big Tech, to not fall behind S&P500. So I compete against the other 495 companies for the rest of 75%.

 

Now given that Alibaba has a light-asset model, the view that Alibaba is cheap is reinforced, but perhaps that is balanced by the high-margin advertising and cloud computing business of Amazon, which gives it credibility to its higher valuation. I don't have much of an opinion on its ability to grow FCF, but I offer this:

 

Amazon had a thin-margin business that really benefitted from the growing high-margin AWS business (i.e. accretive on margins), whereas Alibaba (and for that matter Alphabet) already has/had a high-margin business that needs to invest into low-margin ventures (building up the Cloud business for Alibaba + Waymo (other bets) for Alphabet (i.e. dilutive on margins).

 

So net-net, there should be headwinds for Alibaba's FCF in the short term.

 

 

Edited June 14, 2021 by Xerxes