Alibaba (BABA) Stock to the Moon!?

Where Will Alibaba Stock Be in 10 Years

If you ever worked in the e-commerce space, you probably have heard of Alibaba. Many western entrepreneurs use Alibaba to find manufacturers for their products to sell on their online store.

I use to work for an apparel company that imported clothes from Alibaba that were made from bamboo, and it was really comfortable to wear.

Alibaba is only one of the many companies owned by Alibaba Group. Most of their revenue actually comes from online retail marketplaces such as Taobao and Tmall (Alibaba Group, 2021).

After a huge price drop since October 2020 and hearing that my investor idol, Charlie Munger, had invested in Alibaba Group (Hargreaves, 2021), I decided to do my own research into the company.

How Did the Company Start?

  • In 1999, Jack Ma, a former English teacher, convinced 17 of his friends to join him and start an e-commerce business called Alibaba.

  • Alibaba Group’s initial business model focused on connecting manufacturers in China with companies all over the world using the internet (Broad, 2014).

  • Since then, Alibaba Group has expanded to become one of top 10 biggest company brands in the world (Petroff, 2018).

Current Business Model

  • Alibaba Group is not a simple business to analyze. That’s because they own so many different businesses under the Alibaba Group holding company.

  • Since 87% of its revenue from Q1 of 2021 came from e-commerce related activities, it’s easier to visualize Alibaba Group as a huge e-commerce giant (Alibaba Group, 2021).

  • Alibaba Group is kind of like the “Amazon of the East”. The difference is that Alibaba doesn’t carry any inventory and doesn’t have any warehouses, which gives them a better profit margin compared to Amazon.

  • Most of Alibaba Group’s e-commerce businesses are either software platforms or online marketplaces that facilitate the exchange of goods and services (Johnston, 2021).

  • We will not be breaking down every single one of Alibaba Group’s businesses in this report, but an article on feedough.com explains a lot of the core businesses pretty well.

The Intrinsic Value of an Alibaba Stock

  • Alibaba stock is now in an attractive price range after dropping over 33% since its high at $317.14 per share in October 2020.

  • Using the discounted cash flow method, I calculated that the intrinsic value of an Alibaba stock is worth around $259 per share today.

P/E Ratio

  • Peter Lynch said one of the ways to measure if you are paying a fair price for a stock is to look at the price-to-earnings ratio (P/E ratio). For example, if the P/E ratio of a company is 12, then you have to be able to explain how the company is going to be able to grow an average of 12% annually for the next 10 years (Kennon, 2020).

  • That’s why despite being an amazing company, Tesla is a risky investment because it has a P/E ratio of 586 as of July 2, 2021. It’s pretty hard to explain how Tesla will grow 586% annually for the next 10 years.

  • Alibaba Group’s revenue grew an average of 52% annually from 2011 to 2020. Their cash flow from operation grew an average of 44% annually from 2014 to 2020 (Alibaba Group, 2021).

  • At around $230 per share, Alibaba stock’s P/E ratio would be 26.7. It’s pretty reasonable to assume Alibaba Group can grow an average of 26.7% annually for the next 10 years.

How Will Alibaba Continue To Grow in the Future?

  • Alibaba Group is huge! It’s estimated they currently have more than 50% of China's e-commerce market share (Cramer-Flood, 2021).

  • Its revenue of Q1 2021 grew 64% from the same quarter of last year (Alibaba Group, 2021)

  • The first reason Alibaba Group will continue to grow is that people in China are getting richer every year, and their consumer spending in e-commerce is going up quickly.

  • According to GlobalData, the Chinese e-commerce market is forecasted to reach $3 trillion (19.6 trillion RMB) by 2024, up from $2.1 trillion (13.8 trillion RMB) in 2021.

  • The second reason Alibaba Group will continue to grow is that it’s a lot easier to make more money from the existing customer base by launching new services and products.

  • I have a friend that has a successful digital marketing course business. It took him 5 grueling years to acquire customers and get the business to make around $160,000 a year. But once he started launching new courses to sell to his existing customer base, the business doubled in revenue in just one year.

  • Alibaba Group have more 50% of the Chinese e-commerce market share and a bunch of data on their customers. They can use their customer data to create new services and products to serve their existing customer base, which they have been continuously doing.

  • One of those services is the Alibaba Cloud which currently has 40.1% of the Chinese cloud market share (China Internet Watch, 2021), and its revenue grew 37% in Q1 of 2021 compared to the same quarter of last year (Alibaba Group, 2021).

  • Alipay, which originally started in Alibaba Group, is now a separate entity that the Alibaba Group still has a 33% stake in (Jao, 2019). Alipay is now part of the newly formed financial company Ant Group, and they have 55% of the market share of the Chinese online payment system (Kapronasia, 2020).

  • I believe Alibaba Group can still grow 3X to 4.5X its current size in 10 years.

Charlie Munger Has Invested a Significant Stake in Alibaba

  • Charlie Munger's Daily Journal company has recently purchased a large amount of Alibaba stock in Q1 of 2021 for an estimated cost of $226.73 per share (Hargreaves, 2021).

  • Munger is better known as the vice chairman of Berkshire Hathaway and Warren Buffett’s right-hand man. He is an incredibly smart man with a great track record in the investing world.

  • Other great value investors that recently bought a big stake in Alibaba include Mohnish Pabrai and Greg Alexander. You can view other well-known investors that are currently invested in Alibaba stock using this link.

Risks of Purchasing Alibaba Stock

1) There is a fear of Chinese tech stocks getting delisted.

  • This probably won’t happen because too many Americans and Wall Street people have their money invested in Chinese companies, If the big Chinese tech stocks get delisted, it would also hurt the U.S economy pretty badly (Duggan, 2020).

  • On the other hand, if the worst-case scenario does happen and the U.S does decide to delist Alibaba stock, it doesn’t mean your stock will disappear or your stock value will go to zero. 

  • Your Alibaba stock would probably end up in the OTC market where it will be trading at a lower value than the regular stock exchange (Oberoi, 2020).

2) Alibaba Group was fined $2.8 billion in April after a regulation probe by the Chinese Government (Bloomberg News, 2021).

  • As of March 2021, Alibaba's annual revenue is 110.81 billion, and they have around $49.63 billion in cash equivalents.

  • 2.8 billion fine is only around 2.5% of that revenue and 5.6% of their cash equivalents.

  • Alibaba Group was fined because they had a rule that if a merchant decides to sell on any of Alibaba Group's online platforms, then they can’t sell on a competitor's platform.

  • Now that rule is banned, many investors worry customers would start to flocking to Alibaba’s competitors.

  • More info on the fine.

3) Competition from JD and Pinduoduo

  • The two closest competitors of Alibaba Group are JD and Pinduoduo.

  • JD has 18% of the e-commerce market share, and Pinduoduo has 13% of the market share (Cramer-Flood, 2021).

  • They are both growing rapidly.

  • The reason I am not worried is that the three companies’ business models are kind of different. And Alibaba Group also has more resources compared to the other two.

  • China has around 18.53% of the world’s population according to worldpopulationreview.com on July 3, 2021.

  • I believe the Chinese market is big enough for all three companies.

  • An example would be that my mom uses both Alibaba Group’s Tao Bao app and Pinduoduo’s app depending on what she decides to purchase.

  • Here’s a Reddit thread that compares the difference between the business models of the three companies.

4) The Chinese government made Jack Ma disappear for 3 months near the end of 2020 (Peach, 2021).

  • This news might seem concerning to people who are not from China.

  • I am okay with this news because despite being a co-founder, Jack Ma is not actively involved with the Alibaba Group business anymore.

  • The current CEO of Alibaba Group is Daniel Zhang. He started in the financial department in 2007 and worked his way up to become the CEO in 2015. He is a much-grounded person compared to Jack Ma, but he also emphasizes innovation to stay ahead of the competition.

  • Video of Daniel Zhang

5) Charlie Munger is too old, and his judgment might be off

  • Charlie Munger is 97 years old this year.

  • If you have ever seen any of Munger’s recent interviews, you can see that he is still really sharp.

  • Even though I am highly confident in his predictions, there is still a chance he might be wrong.

Conclusion

  • I think Alibaba is a great investment $230 per share or under, and you should allocate no more than 15% of your investment portfolio to this stock.

  • I personally have invested in some Alibaba stock at an average cost of $227.12 per share.

  • I am 87% confident that Alibaba stock will grow at least 3X to 4.5X in value in 10 years, but there is a 13% chance I could end up losing 20% to 50% of the capital I have invested in this stock.

Disclaimer: I am not a financial expert, and there are a lot of details missing to keep this report from being any longer than it already is. Do your own research and invest at your own risk.


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Thanks for reading!

-George 🐙


References

  • Alibaba Group. (2021, May 12). Alibaba Group Announces March Quarter and Full Fiscal Year 2021 Results [Press release]. https://www.alibabagroup.com/en/news/press_pdf/p210513.pdf

  • Bloomberg News. (2021, April 9). China Fines Alibaba Record $2.8 Billion After Monopoly Probe. Bloomberg. https://www.bloomberg.com/news/articles/2021-04-10/china-fines-alibaba-group-2-8-billion-in-monopoly-probe

  • Broad, B. M. (2014, September 14). Alibaba: What exactly does it do? BBC News. https://www.bbc.com/news/business-29077495

  • China Internet Watch. (2021, June 28). China cloud computing market in Q1; Alibaba has 40% market share. https://www.chinainternetwatch.com/30820/cloud-infrastructure-services/

  • Cramer-Flood, E. (2021, February 10). In global historic first, ecommerce in China will account for more than 50% of retail sales. Insider Intelligence. https://www.emarketer.com/content/global-historic-first-ecommerce-china-will-account-more-than-50-of-retail-sales

  • Duggan, W. (2020, December 13). Alibaba Isn't Getting Delisted, but There's Opportunity in the Drama. InvestorPlace. https://investorplace.com/2020/12/alibaba-isnt-getting-delisted-but-theres-opportunity-in-the-drama/

  • Hargreaves, R. (2021, April 9). Charlie Munger’s Daily Journal - GuruFocus.com. GuruFocus. https://www.gurufocus.com/news/1395950/charlie-mungers-daily-journal-buys-alibaba

  • Jao, N. (2019, September 24). Alibaba gains 33% of Ant Financial in conclusion of spinoff deal. TechNode. https://technode.com/2019/09/24/alibaba-gains-33-of-ant-financial-in-conclusion-of-spinoff-deal/

  • Johnston, M. (2021, February 4). How Alibaba Makes Money: offering digital marketplace services. Investopedia. https://www.investopedia.com/articles/investing/121714/how-does-alibaba-make-money-simple-guide.asp

  • Kapronasia. (2020, October 7). Is the Alipay/WeChat Pay payments duopoly at an inflection point? - Kapronasia. https://www.kapronasia.com/china-payments-research-category/is-the-alipay-wechat-pay-payments-duopoly-at-an-inflection-point.html

  • Kennon, J. (2020, November 5). Legendary Peter Lynch’s Winning Stock Formulas. The Balance. https://www.thebalance.com/peter-lynch-s-secret-formula-for-valuing-a-stock-s-growth-3973486

  • Oberoi, M. C. (2020, December 4). What Delisting Means for Alibaba, China, and You. Market Realist. https://marketrealist.com/2019/09/what-delisting-means-alibaba-china-you/

  • Peach, B. S. (2021, March 20). Why did Alibaba’s Jack Ma disappear for three months? BBC News. https://www.bbc.com/news/technology-56448688

  • Petroff, A. (2018, May 28). Two of the world’s biggest brands are now Chinese. CNNMoney. https://money.cnn.com/2018/05/28/news/companies/biggest-brands-ranking-2018-alibaba-tencent/index.html