Alibaba (NYSE: BABA) Update

Since recommending Alibaba in February the company has traded sideways. Yet at the same time much has happened in this time as the company was charged a massive 2.75 billion dollar anti-monopoly fine and Alibaba’s largest headwind, the threat of a breakup, was removed. People’s Capital has examined Alibaba’s market position since initially recommending the company and reaffirms our buy recommendation more strongly than ever.



What We Love:

  • Alibaba is the largest e-commerce company in China with 53% of market share.

  • Alibaba owns 33% of Ant Financial, the largest fintech, and mobile payment service is in China.

  • Alibaba’s live stream shopping has become incredibly popular and made online shopping entertainment in China.

  • The company is greatly undervalued compared to its US peers.

  • Alibaba Cloud is the largest cloud storage provider in China and fourth-largest in the world.

  • With the announcement of the 2.75 billion dollar fine, the Chinese government stated they are no longer breaking up Alibaba for monopoly concerns.


Potential Risks for Alibaba remain unchanged:

  • While the threat of a breakup is significantly lower, the possibility of politically motivated regulation on Alibaba is still a possibility.

  • Tensions between the US and China are high and investors may drop Chinese stocks if there is a trade war.

  • Alibaba is facing increasing competition in e-commerce in China.



Update:

In early April China fined Alibaba a record $2.75 billion for anti-competitive practices. The fine is one of the largest regulatory fines in history and represents 4% of Alibaba’s 2019 total revenue. It would be reasonable to assume that after the announcement shares of Alibaba would tank, however this is not what happened. Instead the share price jumped 4% as investors in the company were happy to see that the Chinese government was simply placing a fine on Alibaba instead of forcing a breakup of the company. Since then Alibaba has been trading in the 220s without significant movement in either direction. We at People’s Capital are pleased to see that the Chinese government chose not to take more drastic measures in regulating Alibaba. While the fine is a significant amount, Alibaba has more than enough cash on hand to easily pay the fine. Here the key takeaway isn’t that Alibaba was hit with a large fine, but that it wasn’t forced to break up into several smaller companies. Looking forward, this affirms our view that the Chinese government is not willing to significantly hurt its largest company. While we have yet to see significant price movement upward after the announcement of the fine, we believe it is only a matter of time before China wary investors realize that Alibaba is not only an incredible company but also a safe investment.


Original Report:


As the largest e-commerce site in what will soon be the world’s largest economy, it's hard to overstate Alibaba’s potential. The company operates similarly to Amazon, offering online shopping, payment services and cloud computing.

Alibaba’s core business as an online marketplace is incredibly successful. Alibaba.com and the company’s other sites account for 53% of all online shopping in China in 2020 and experienced record growth as Covid-19 forced everyone’s life online. The company now has 902 million monthly active users and is growing rapidly, with 22 million new users signing up between September and December. It is worth noting that Alibaba’s market share for e-commerce actually decreased from 2019 to 2020. However, at People’s Capital, we do not believe this is a major threat to the company. The company still has a significantly larger market share than Amazon’s 37% in the US, and the decline can be attributed to diversification of online markets as China develops. In the long run we do not think this decline is a significant trend and believe there is space in China for multiple online shopping sites where both Alibaba and others can thrive. Alibaba also has a competitive edge over its competition as the company’s live streams where shoppers tune in for an interactive shopping experience are incredibly popular and have changed consumer’s shopping habits in China.


Beyond e-commerce, Alibaba owns a 33% stake in Ant Financial. Ant and its subsidiaries are the largest fintech and mobile payment platform in China. Mobile payment is incredibly widespread in China, with $7.6 trillion dollars worth of sales occurring through mobile payments in 2020. Alibaba stands to benefit tremendously from its stake in Ant as mobile payments continue to grow.


Yet while Ant is a massive asset to Alibaba, Ant has caused headaches for Alibaba. Last November it was announced that Ant Group’s IPO, which was to be the largest in history, was put on hold by regulators. While the official reason given by the Chinese government was to make sure the company was complying with all regulations, the delay was actually a retaliatory move against Jack Ma, the founder of Alibaba. Jack Ma has been an outspoken critic of the Chinese Communist Party (CCP). It was also announced that Chinese investigators were going to investigate if Alibaba was a monopoly and consider breaking up the company. This news sent the stock price plummeting from around $320 a share to $222. Since then the share price has recovered to around $265 as the fears of a break up of the company appear overdone. These regulatory actions appear to us at People’s Capital to be threats meant to remind Alibaba and Jack Ma that they are subject to the will of the Chinese government--not an actual attempt to break up the company. In our opinion, it is incredibly unlikely that the Chinese government would actually break up its most successful and largest company as they are prioritizing tech and software development. Instead of a long term threat to Alibaba, we believe the news of regulation and the drop in share price that followed is a chance to pick-up shares of Alibaba at a cheap price.

On top of its incredibly successful online shopping business and its fintech subsidiaries, Alibaba is also a major player in cloud services. The company is the largest provider of cloud services in China and 59% of all Chinese businesses use Alibaba’s Cloud. It is also the fourth largest cloud provider in the world. While we find it unlikely that Alibaba will ever be a significant provider for cloud computing and storage in the US, Alibaba has ample opportunity to grow in Asia and is better positioned to expand in the Asia markets than its US competitors.


On a fundamental level, Alibaba is solid. Unlike many tech companies that don’t even turn a profit, Alibaba is doing incredibly well financially. The company earned $7.90 per share for 2020, an astounding 59% increase from 2019. The company forecasts that earnings will continue to grow rapidly for the considerable future. Despite this amazing growth Alibaba currently has a low valuation, with a PE ratio of 28.8. Compared to similar companies like Amazon and Etsy, which have PE’s of 78 and 125.6 respectively, we find that Alibaba is unvalued. Investors are currently discounting Alibaba due to its regulatory concerns, which we expect to be cleared up by the end of 2021. While Alibaba is unlikely to garner a PE similar to Amazon because it is a Chinese company, the share price will most likely rise as regulatory pressure eases.


While Alibaba faced significant regulatory headwinds recently, we at People’s Capital believe the company will overcome these problems within the next year. Once this occurs investors will once again appreciate Alibaba for the powerhouse in e-commerce, fintech, and cloud computing that the company is. In a three to five-year time frame, we believe Alibaba’s share price will rise significantly as both the company and the Chinese economy rapidly grow. It should be noted that this is a long-term position, on a 3-5 year horizon. In the short term, depending on stimulus, the state of the pandemic, and general instability in the market, Alibaba could see declines before rising.


Best,


The People’s Capital Team


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