Summary
Alibaba Group Holding Limited disappointed with Q2 results.
The stock dropped hard and now appears cheap on most metrics.
While we recognize the regulatory and political risks, Alibaba is actually being impacted by something far worse.
This idea was discussed in more depth with members of my private investing community, Conservative Income Portfolio. Learn More »
Feng Li/Getty Images News In this market it is rare to find a growing company that is not trading at some insane multiple of sales. So when you find a company that is trading like an old economy stock and delivering on its potential, you have to certainly pause and examine it. Alibaba Group Holding Limited ( BABA ) is one such company that is growing at a rapid double digit clip rate and one where we can honestly say that we have been very tempted. But we have not gone in yet. We tell you why alongside a look at its recent results. The Bull Case
BABA meets at the junction of value and growth and presents a compelling opportunity on the future of over a billion people. With a P/E multiple now approaching 15, the stock is trading at almost one-sixth the valuation of Amazon ( AMZN ). Data by YCharts Assuming BABA can deliver even 10% growth rates alongside a gentle valuation expansion to a 20X multiple, the stock can deliver 15%-20% compounded over the next four years. Of course one can get those kind of growth rates in multiple places, but with BABA you are not paying anything substantial for it. The Results
BABA missed on the top line, but barely. Revenue of RMB 200.69B came in 2% shy of estimates. The Non-GAAP EPS was a far worse hit, coming in RMB 1.24 under estimates. Many bulls contend that this was a small miss overall, and the stock is being punished rather unfairly. We have a different take. The earnings estimates have been crushed in the last 12 months. Analysts have been so offside on this that they have been doing double time trying to align these numbers to reality. March 2022 numbers are down 12% in the last six months. The next three years are all down from 14.58% to 35.92%. Those are monster moves. The fact that BABA missed these revised down numbers with such vigor just goes to show how bad these earnings were. BABA has dropped in the last six months, wait for it, as much as its 2025 earnings estimates have dropped. Data by YCharts By that valuation (3-year forward P/E) BABA is no cheaper today than it was six months back. One other point here is that earnings estimates are dropping far faster than revenue estimates. This plays into what we saw this quarter as well, as the earnings miss was worse than the revenue miss. There is an extreme amount of margin compression happening here that is challenging the entire growth thesis. What’s Going On?
There are some excellent author takes on the competitors in China and regulatory policy changes. That is not what we want to address though. We instead want to focus on what we think is actually the largest risk for BABA.
We are referring to the implosion in largest asset class known to man. China’s real estate market. Over the last three decades China has pulled forward massive demand by building cities and cities. China’s cities having some of the most insane metrics for residential properties. This bubble is very hard to visualize for the common investor. We will point to a couple of things though that may help. China’s construction has dropped slightly in the past few months. As the bubble has begun to burst, the slowdown in new builds has already skyrocketed iron ore inventories. We are not even through the first few months of what is likely to be a long drawn out digestion process and we are seeing near all-time high inventories for the primary casualty, iron ore. With 15% of China’s jobs tied to real estate, we expect GDP growth to flatline over the next 12 months at least.
The other facet of this is how much fraud was hidden underneath this property bubble. Evergrande’s ( OTCPK:EGRNF ) last reported balance sheet before the blow up showed current assets exceeding total debt. Think about that for a minute. When a company with current assets greater than total debt struggles to pay the interest on that debt, there is a massive problem underneath in […]
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