Summary
Alibaba’s shares slumped to new lows in recent days on the back of delisting worries, despite the fact that BABA is not impacted.
Macro risks should not be ignored, but investors’ reactions to them seem overblown.
Alibaba is trading below fair value, and there is a lot of upside potential once markets become calmer and less ruled by emotions.
Looking for a helping hand in the market? Members of Cash Flow Kingdom get exclusive ideas and guidance to navigate any climate. Learn More »
David Becker/Getty Images News Article Thesis
Alibaba Group ( BABA ) has been extremely volatile in recent weeks, with non-company-specific news items being the main reason. I believe that market reactions to these news items are oftentimes overblown and that Alibaba’s price action has been quite irrational in the recent past. In this report, I will highlight some of the overblown worries and why I believe that they are less important than some investors think, and I will outline why I think that BABA is a worthy investment at current prices based on a sum-of-the-parts analysis. Alibaba: Massive Price Swings With Volatility Way Outside Of The Normal Range
Alibaba Group has seen its shares move up and down by more than 10% on some days in recent weeks, which is highly unusual for large-cap tech companies. This is, I believe, to a large extent driven by irrational short-term reactions to news items that are not all that material in the long run. A good example of that is BABA’s 10% share price increase following the announcement of a new CFO. Sure, a new CFO might make some changes when it comes to the pace of share repurchases, and might improve shareholder communication, but generally, a change-up in the C-suite does not warrant a $30 billion change in a company’s market capitalization — especially if it isn’t even the CEO position that is changing. As we see in the above chart, BABA’s current volatility is way outside of the norm, and massively higher compared to what we see in large-cap US-based tech companies such as Amazon ( AMZN ), Alphabet ( GOOG ), or Microsoft ( MSFT ). Volatility has not always been this high, and the last time BABA’s 30-day volatility spiked to above 60% — in early 2021, when BABA regulation fears were high prior to the $2.8 billion fine — volatility declined significantly to be more in line with US-based peers following that spike. There is no guarantee that the same will happen this time, but I would not be surprised to see volatility subside in the coming weeks, to a more “normal” level.
Note: If historic patterns hold true and volatility declines, selling covered calls or cash-secured puts right now could be a good idea, as the currently high volatility would lead to high premiums, whereas premiums would decline if volatility reverts back to a lower level.
The hefty price swings we have seen in Alibaba do allow for profitable day-trading for those that engage in it and can lead to highly-attractive long-term entry points for buy-and-hold investors. Those that bought Alibaba at the lows of around $110 a couple of days ago entered a position at an incredibly low earnings multiple of 11, based on next year’s expected earnings per share of $9.70 — an 11x earnings multiple in a growth stock is almost unheard of. Macro Fears And Why I Believe That They Are Overblown
Alibaba has not seen its shares decline massively over the last year due to declining revenues, product issues, or other company-specific items. Instead, the key drivers for the weak share price performance were macro fears. Three important ones are Common Prosperity , Regulation , and Delisting . Common Prosperity
Common Prosperity is a policy/strategy of the Chinese government that seeks to make average citizens in China benefit from economic growth. In general, that doesn’t sound too bad, as wealth is very unevenly distributed and since there are still hundreds of millions of people that are below the middle class, despite the middle class growing rapidly in recent years.
Alibaba did, like some other Chinese companies, announce their participation in the Common Prosperity initiative. Alibaba pledged to invest $15 billion in this initiative by 2025, or about $3 billion a year in 2021-2025. That money, of course, will not be lost, as some of the investments should actually be beneficial for Alibaba in the long run. Better working conditions and benefits, such as improved […]
Protected by Patchstack