This quarter, Alibaba missed on revenue and EPS, and lowered guidance for the year. Sounds terrible, and their stock fell around 17% and made a new low.
Here is why I’m buying even more stock, making it the biggest position in my portfolio:
Let’s break down the results –
The good -
Revenue was up 29% YoY, operating income up 10%, annual customers up 5%, and the cloud business grew 33%.
Now, the “bad” –
Adjusted EBITDA was down 29%, net income down 39%, and EPS down 38%.
Why did they have these misses?
Reading the earnings call shows it was due to massive investments into future growth (about $1.6 billion). If we add the $1.6 billion back to net income, it would be flat over the year, not down 40%. Moreover, if these investments prove profitable, they could drive earnings even higher in the future.
Hence, the stock dipping is fantastic news for us long-term investors, and this can even further increase the gains we can reap from this already cheap stock.
How will the business do in the future?
To project this, we can divide BABA’s revenue into commerce and cloud (leaving out media and entertainment, which bring in minimal revenue).
The commerce business grew revenue by 31%, which is again fantastic (especially post C0VID) and should also help increase earnings growth. The E-commerce market is also expected to grow at 22.9% CAGR by 2027, so there is significant potential for future growth.
The cloud business grew revenue by 33%, which is exciting as I believe it will be core to BABA’s profitability in the future, being a very high-margin business. The cloud market is expected to grow to $1.25 Trillion by 2028, with a CAGR of 19.1%.
What about their valuation?
You’ve heard it repeatedly, and BABA is a very cheap stock.
It’s down 65% from highs and is trading at the same price it did in 2014. However, the company is doing great.
To back that statement, let me show you BABA’s fair value based on a Discounted Cashflow Model by @EverythingMoney–
Assuming revenue to grow at half its rate it has the past 5 years, and trading at Free Cash Flow of 18 (mean at 33x), a conservative fair value is $550.
This assumes that the stock will never return to normal, growth will slow down, and valuation will compress by half.
Even in the worst-case scenario, the stock has a 21% upside.
When the stock price is $500+ in the future, it won’t matter whether you bought the stock at $120 or $170, but that you bought it. Taking advantage of such mismatches between stock price and company fundamentals is where wealth is built, and I believe this to be a generational opportunity.
What are the potential risks?
The main risk to BABA is further crackdown from the government, resulting in fines or rules slowing down its growth. However, this is very unlikely as BABA furthers China’s economic growth.
Despite being spoken about a lot, delisting BABA is not a risk. ‘9988’ is the ticker symbol for BABA on the Hong Kong Stock Exchange. 1 BABA share is equal to 8 “9988” shares. If it does get delisted, you can convert your BABA shares directly to 9988 shares directly in your broker, and then trade your shares in Hong Kong. Hence, those preaching to avoid BABA due to the fear of delisting don’t know what they’re talking about.
My long term outlook -
BABA is a robust and high-growth business that trades at a rock-bottom valuation. I believe that it will be worth it in the long term.
Being extremely conservative, within 3 years, I see BABA at $400, giving us a CAGR of 48.5%! That’s 228% above current prices. This is a 2 bagger in 3 years, and if all the fear goes away, it should give us a 1000% return and be a 10 bagger within 10 years!