Why do I have 60% of my portfolio in this stock?
- Oskar Volčanšek
- Dec 8, 2024
- 5 min read
Yes, you read right, I have 60% of my portfolio in one stock, which is Alibaba. In this blog, I will explain what makes me so convinced.
Alibaba, what does it do? Different segments
Alibaba breaks down its business into 7 main sections: China Commerce, International Commerce, Local Consumer Services, Digital Media and Entertainment, Innovation and Other Initiatives, Logistics, and Cloud.
I will add a description of businesses under each separate category(I will add only the description of important categories and important businesses, if you want to read everything you can on this link: https: //www.alibabagroup.com/en-US/about-alibaba-businesses), so if you want to understand what Alibaba group does read this.
China Commerce
Taobao provides consumers from both large cities and less developed areas with an engaging, personalized shopping experience, optimized by data analytics and technology. Through highly relevant content, engaging and interactive formats, and real-time updates from merchants, consumers can learn about products and new trends. They can also interact with each other and their favorite merchants and KOLs through a broad range of interactive features such as live streaming and short-form videos. Merchants on Taobao are primarily individuals and small businesses.
Tmall caters to consumers’ ever-growing demand for high-quality products and premium shopping experiences. It serves as a platform for consumers in China and overseas to buy both homegrown and international branded products as well as products not available in traditional retail outlets. A large number of international and Chinese brands and retailers have established storefronts on Tmall.
1688 is China’s largest integrated domestic wholesale marketplace in 2021 by net revenue, according to Analysys. It provides sourcing and online transaction services by connecting manufacturers and wholesale sellers to wholesale buyers in China who typically trade in apparel, accessories, packaging materials, office supplies, home decoration and furnishing materials, electronics, and computers, among others.
International Commerce
AliExpress is a global marketplace targeting consumers around the world and enabling them to buy directly from manufacturers and distributors in China and around the world.
Lazada is a leading and fast-growing e-commerce platform in Southeast Asia that provides consumers access to a broad range of offerings from local SMEs, and regional and global brands. Lazada serves its consumers and merchants with reliable, quality, and convenient logistics services that are critical to the online shopping experience in Southeast Asia. It operates one of the leading e-commerce logistics networks in Southeast Asia, with the vast majority of its parcels going through its facilities or first- and last-mile fleet.
Alibaba.com The first business of Alibaba Group, Alibaba.com is China’s largest integrated international online wholesale marketplace in 2021 by revenue, according to Analysys. It connects Chinese and overseas suppliers to overseas wholesale buyers, who are typically trade agents, wholesalers, retailers, manufacturers, and SMEs engaged in the import and export business, and provides sourcing, online transactions, digital marketing, digital supply chain fulfillment, and financial services to them.
Local Consumer Services
Ele.me (which means “Are you hungry?” in Chinese) is a leading local service and on-demand delivery platform in China. It enables consumers to use the Ele.me, Alipay, Taobao, and Koubei mobile apps to order meals, food, groceries, FMCG, flowers, and pharmaceutical products online. In addition, Fengniao Logistics, Ele.me’s on-demand delivery network, provides last-mile logistics services, including delivery of food, groceries, FMCG, and pharmaceutical products for Freshippo, Sun Art, Alibaba Health, as well as Taoxianda.
Logistics
Cainaio is dedicated to meeting Alibaba Group’s logistics vision of fulfilling consumer orders within 24 hours in China and within 72 hours anywhere else in the world. To realize this vision, Cainiao continues to build and operate a global fulfillment network together with its logistics partners. It offers domestic and international one-stop-shop logistics services and supply chain management solutions, addressing various logistics needs of merchants and consumers at scale. As of March 31, 2022, Cainiao directly operated nine overseas sorting centers and partnered with over 500 logistics partners to provide fulfillment services globally.
Cloud
is the digital technology and intelligence backbone business of Alibaba Group. It offers a complete suite of cloud services to customers worldwide, including proprietary servers, elastic computing, storage, network, security, database, and big data.
Nice balance sheet
The balance sheet is nice, Alibaba has 3* times as many assets as liabilities, and short-term assets are 100 billion yuan larger than all the liabilities combined, the only thing, that caught my eye is that there is some goodwill, but that's not a problem, as all other assets are good.
Huge amount of money
Alibaba currently has a net cash position of 61 billion $ against a market cap of 180 billion $, which means that you are not paying 75$ per share but around 50 after accounting for cash.
Dividend
As of last year, Alibaba also started paying a dividend, if you buy the stock listed on the US stock exchange you will receive 1$ per share + a one-time extraordinary cash dividend of 0,66$ in total 1,66%. This means if you buy Alibaba(Ticker: BABA) stock today, you will receive a dividend yield of 2.10%
Share buybacks
On March 31, 2024, Alibaba published an update regarding its buyback program, the company repurchased 4,8 billion $ worth of stock in the last quarter and 12.5 billion $ in the previous year which means the number of shares outstanding fell by 5,1%.
In simple terms, my piece of the pie increased by 5,1% in the last year, without my buying any additional company stock.
Valuation
In my valuation discounted cash flow analysis I made three scenarios:
In a normal scenario I estimated that Alibaba's free cash flow will grow by 8% for the first five years of the valuation and 4% for the second half of the valuation.
In a bad scenario, I estimated that Alibaba'searnings will grow by 0% for the first five years of the valuation and 0% for the second half of the valuation. But I think this case is almost impossible, because I think Alibaba will be able to grow its Free cash flow in the future + share buybacks will decrease the number of shares outstanding thus increasing free cash flow per share
In the best scenario, I estimated that Alibaba's earnings will grow by 10% for the first five years of the valuation and 8% for the second half.
In all three cases, I used my required rate of return of 10%. In the end when I weighed all three scenarios (the normal scenario presents 60% of the final intrinsic value, bad case 20%, and best case 20%) I got the fair value of Alibaba of 135,57$ per share, as I said Alibaba has huge amounts of cash, so that's why we have added net cash to get the final valuation of 159,73$ per share. This only shows how severely Alibaba is undervalued.
After adjusting for cash Alibaba trades at Price/Free cash flow of under 5, this means that if you buy the whole company today, you will get your money back in less than 5 years. Compared to S&P 500 which has PE/ration of 25.
Free cash flow (FCF) represents the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets
What about the risks associated with China?
Besides slowing growth the main reason the stock is cheap is China, what happens if China attacks Taiwan?
I completely acknowledge the risk, but what happens with Nvidia? Most of their chips are produced in Taiwan, if China attacks Taiwan, overnight 2 Trillion dollars of value will be wiped off the market.
What happens with all the companies that depend on Nvidia chips for their operations?
Yes, that risk is always here, for me the risk-to-reward ratio is just too good to pass, I am young, and even though Alibaba represents 60% of my portfolio, it presents a little bit over 10% of my net worth. I would say that if you are thinking about investing in Alibaba have the risk of China attacking in mind in mind.
Final thoughts
To conclude this blog, first of all, Alibaba is a good business generating more than 20 billion dollars a year, while having 61 billion in net cash, a third of the market cap.
While yes there are risks with China attacking Taiwan, the same risk could be attributed to Nvidia but no one seems to care about it.
As I said I am young and, that's why if something goes wrong I can recover, Alibaba in my opinion is currently too cheap not to buy, and it seems that over the next god knows how many years Alibaba will bring incredible returns to their shareholders.
I have a big position in the stock and plan to increase it as the stock stays cheap.
Comments