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Oct 1, 2021
[3 min Read]
The largest Chinese e-commerce company that has been dropping consistently since October of last year. (at this point in time, it has fallen over 50% from its historical highs)
It all started when CEO Jack Ma decided it would be a splendid idea to insult the Chinese government (saying that their regulations are outdated) in front of the Chinese government.
It was not a particularly intelligent move on Mr. Ma's part.
During the first few months of his absence, many speculated that he was locked in prison, silenced, or worse by the Chinese government. Since then, we have confirmation that the man is still alive and well, but he is not making nearly the number of public appearances that he used to. Although I don't know for sure, I am willing to speculate that he was just under house arrest while Mr. Xi gave him a good spanking and made sure he didn't get so cocky again.
This and more recent complications with China, However, plunged the stock price to 2017 levels. The more recent complications I include the fear of nationalization, a 2.8 billion dollar fine on Alibaba, forcing the company to share its data, the shutdown of the Chinese tutoring industry, the restrictions on the gaming industry, the impending of the Evergrande collapse, and etc. All this has contributed to the rapid decline of most Chinese companies traded in the US.
Today, I would like to analyze the risks of Alibaba. There are plenty of posts and videos out there covering the clear difference between Alibaba's stock price and its intrinsic value, but I think a blind man could even see that Alibaba is currently ludicrously undervalued when looking at its numbers, which is why I think it is more important to look at the current risks of Alibaba.
First of all, the greatest risk to an investor in Alibaba is simply that the stock keeps tumbling while being driven by negative sentiment and momentum, plus it does not help when it seems that there is addition bad new coming out of China every month. But if one is thinking in the long term, this risk of this is negligible, as Alibaba still sits at a very attractive price.
Secondly, the risk of nationalization. I find the fact that people think China is going to kill the hand that has been feeding them for the past decades (free market capitalism) ridiculous. Sure, the Chinese government has definitely not adopted a Les Affaires approach to capitalism seeing that they are more than willing to control certain sectors of the economy, but I can guarantee that they are not planning on reverting to good old communism, as it has clearly not served them well in the past.
Continuing on the point of nationalization: the shutdown of the entire Chinese tutoring industry and restriction of the gaming industry was a bit extreme, but I would assume that the CCP would argue that it was a necessary move to deal with China's growing demographic problem. (If you are interested in that check out this video).
In terms of numbers, you can actually see the effects of the 2.8-billion-dollar anti-trust fine on BABA's balance sheet. Although it looks quite painful in the short term, this fine will likely not hinder the company's performance or FCF significantly in the long term. Most importantly, this fine will not have a substantial impact on the company's valuation.
Sadly, I do not have enough expertise or knowledge to touch on the part of Alibaba sharing its data and how that would affect the company's valuation or future. I also do not understand in detail the nature of the Evergrande collapse to confidently discuss how that would affect Alibaba.
Nevertheless, I still think Alibaba presents a uniquely asymmetrical investment opportunity at this moment based on the extreme undervaluation, high growth, and hopefully, a current market overreaction to all the bad news coming out of China at roughly the same time. I understand that I left out a couple minor and major points regarding what is currently happening in relation to Alibaba, but I am simply too exhausted to research or type anymore so this is all you are getting. To conclude, I had already invested a couple thousand dollars into a few BABA shares and long term ATM options, and I am excited to see what happens in the coming months and years.
What do you guys think about the risks with Alibaba?