Could Alibaba and Chinese Tech stocks be staging a legit rebound as they may have bottomed in March 2022?
Alibaba is still delivering double digit revenue growth in spite of facing slowing consumer demand, the country’s real estate problems, and increased competition.
Chinese stocks cratered as some Chinese cities like Shanghai entered into a lockdown in March through May 2022. Imagine Texas, with a similar population size as Shanghai, shutting down for 2.5 months?! With a population of 28.5 million, Shanghai’s lockdown did definite economic damage to many Chinese businesses.
After having reached a 52 week low of $73 per share in mid March 2022, BABA hasn’t re-tested these lows as it was trading in the $80-90 range throughout the spring.
It recently crossed back over the $100 per share threshold as it looks like Wall Street firms are starting to warm up to BABA again.
Goldman Sachs and other investment banks may be signaling that the “worst is over” for Chinese Internet stocks if we look at Kraneshares China Internet ETF (KWEB) as a proxy. It had declined by 80% in March 2022, only to now be down by 70% from the February 2021 peak of these stocks.
Wall Street firms such as JPMorgan, Citigroup, Fidelity, Amundi, and BlackRock have all been buying into BABA throughout the March declines and since then.
In mid June 2022, BABA jumped from positive news that Ant Group’s application to form a financial holding company was accepted by the People’s Bank of China. Throughout June it had been pumped up from rumors that Ant would be able to IPO, but that’s not yet on the table.
Since Alibaba owns 33% of Ant, at its peak valuation of $150 billion, Alibaba would have had an investment worth $50 billion but that could not yet be realized due to Ant’s IPO getting scrapped in November 2020.
About 53% of Chinese consumers use Ant’s Alipay, a popular mobile payment app, which is incredible if that’s about 700 million Chinese. In comparison, among the 133 million US iPhone users, only about 6% are using Apple Pay in stores, which would be a paltry 8 million people in the US. We are behind using mobile payments compared to Chinese consumers’ use of Alipay and WeChat.
As Wall Street was gaining in bullish sentiment on BABA, superinvestors were turning more bearish in Q1 2022. There were only 5 buys, 8 sells, and 3 holds on BABA as of 13F filings from Q1 2022 among superinvestors I track.
Some of what stood out to me was that BABA bulls Bill Miller and Ray Dalio kept buying, while previously some of the biggest Alibaba cheerleading owners Charlie Munger representing DJCO and Greg Alexander of Sequoia / Conifer Management appeared to become more bearish. DJCO sold 50% of its BABA stake, perhaps for tax loss harvesting reasons (though how would it work if the purchase was done in the prior year and DJCO sold this year?).
It surprised me that both Greg Alexander and Phil Town turned so bearish that they sold entirely out of BABA. Maybe there are more attractive opportunities elsewhere with the NASDAQ down 32% YTD.
What is noteworthy is how Ray Dalio of Bridgewater Associates is putting his money where his mouth is. Bridgewater’s equity positions as of Q1 2022 included 3 Emerging Markets ETFs among its biggest holdings in addition to some American consumer staples.
What’s especially impressive is how much more confidence Dalio and Bridgewater gained in BABA, making it into their 6th biggest position in Q1 up from their 8th biggest position in Q4 2021. The amount Bridgewater has invested in BABA went from $507 million in Q4 2021 to $814 million in Q1 2022, an increase of $307 million!
Looking at Alibaba’s financial performance, the results have been pleasantly surprising as they delivered 18% YOY revenue growth in China eCommerce and 23% YOY revenue growth in their cloud business. Given how China’s economy and BABA’s stock have been suffering, you wouldn’t have thought Alibaba could still deliver stellar results but they appear to have across most of their segments.
Cloud revenues for Q1 2022 were $11.76B vs Q1 2021 $9.26B, and their income loss was less than half of last year’s at $815M vs 2021’s loss of $1.9B. I thought they would’ve started breaking even by now but I guess not yet. Maybe within the coming year they’ll not only break even but start generating positive cash flows from the cloud.
One portfolio manager named Sid Choraria estimates that Alibaba’s cloud revenues will more than double to $25B within 3 years, which would be fantastic.
Moreover, in late March 2022, Alibaba’s management increased their share repurchase program amount to $25B, up from a previous program amount of $15B. When they announced this increased stock buyback commitment, that may have helped to put in a floor in Alibaba’s stock price when it was in the $70-80 per share range.
Within this current buyback program, they have repurchased $9.6B worth of BABA ADRs, leaving another $15.4B with which to buy back the stock. They bought back $2B of BABA ADRs in Q1 2022. By the end of their fiscal year in March 2022, they still had a net cash position of $54B, similar to last year. However, their free cash flows are down significantly compared to last year and it will probably not look great for Q2 2022 but maybe will improve by Q3 or Q4 after recovering from effects of the lockdown.
I highly encourage you to do your own intrinsic value calculations of BABA because some intrinsic value examples from articles might lead you to believe that it is a value trap stock. It might be one if it were only delivering single digit growth rates, which it seemed to do in Q1 2022. However, if you look at its yearly and multi-year growth rates, it has produced mostly double digit growth rates, which potentially translates into not being a value trap stock at its current stock market price if we believe the fund manager Sid Choraria’s opinion.
Even though it appears as though superinvestors have turned bearish on BABA as Wall Street is willing to dip a little into Chinese stocks, maybe they will gradually become bullish again in Q2. I think eventually superinvestors like Charlie Munger and Ray Dalio will prove to be correct as I believe the future looks bright for Alibaba.
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