Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Is Alibaba set to soar?
Alibaba (NYSE:BABA) is typically described as China’s Amazon, but it is so much more. Anyone undertaking a true analysis of the business would likely need to include Alphabet, PayPal, Microsoft and potentially even Intel in their comparison to US technology giants.
The company and its distinguished founder, Jack Ma, have been somewhat of a lightning rod for the global investment media and portfolio managers alike. Following a poorly timed decision to ‘pop his head out of the sand,’ Ma has seen the rug pulled from under his booming ANT Financial business.
There is a long list of well-known fund managers calling China ‘uninvestable,’ yet the most common and relevant saying in market remains ‘buy when there is blood in the streets’, and there likely couldn’t be more blood than what has been seen in 2021.
One of the biggest reasons why most global growth managers are avoiding China today is because they have historically been ‘dabblers’ in the region. That is, China formed only a small part of their portfolio, when the unique culture demands a concentrated and focused approach to the region.
Take the ANT Financial story for instance, where the IPO was pulled at the last minute and Jack Ma blamed for speaking out on political issues. A closer look of the business highlighted the fact that the company had become so important to China, providing about 20 per cent of all consumer debt, on an unsecured basis, that the government may well have thought ANT was too big to fail. In fact, the business was being run with no capital requirements, despite being a significantly important lender.
All the headlines around regulatory crackdowns have sent the Alibaba price down more than 50 per cent since October 2020, meaning it now trades on a forward price-earnings (P/E) ratio of just 15 times 2020 forecast earnings. That is a full 25 per cent cheaper than the S&P500. This despite the fact that the company through its Taobao and Tmall e-commerce businesses still controls close to 50 per cent of the market in China.
The group has more than 1.2 billion annual active users and has been growing revenue at a rate exceeding 30 per cent for several years. While many compare Alibaba to Amazon, its business model is more akin to those of eBay and Google, such that it is able to generate significantly higher margins by delivering advertising and ranking, rather than just product sales.
Put the e-commerce business to the side and Alibaba becomes even more interesting. The group owns similar business lines in Europe and Asia, with AliExpress the most popular app in Russia.
After founding Alibaba Cloud around 11 years ago, the group has now reached critical mass, turning a profit for the first time while still growing above 50 per cent a year as the digitalisation trend spreads throughout Asia. This has placed it third in the world behind Amazon and Microsoft in the cloud computing stakes.
As it typically the case with winner-takes-all technology companies, Alibaba has recently launched its own semiconductor chips that will be used within its cloud business, further insulating the business from the growing semiconductor shortage and potentially opening up a new business line.
Such has been the underperformance that renowned value investor Charlie Munger has nearly doubled his investment in Alibaba over the last 12 months. And why not? Investment research platform Gurufocus suggests with free cash flow of US$45 billion in 2025 and based on a comparable multiple of 25 times, the company could join Tesla as the next trillion-dollar company.
