Welcome back. Everyone to the Joseph Carlson
show on today's episode. We're going to be talking about
Ali. Baba, everyone's favorite
Chinese stock. Now I'm one of the ones that I'm
invested in Ali Baba. I'm actually a content creator
that when I talk about stocks ones that I want to invest in, I
put my money where my mouth is and I invested 11,000 dollars in
Ali, Baba at an average Shear price of $175.
Now currently Ali, Baba trades at 86 So as of right now, I'm
down 50% on this investment. Now, I'm not the only one,
there's many people invested in Ali Baba, I hear the chatter, I
hear the buzz, I keep track of what people are invested in, and
there's a lot of people invested in this company because
initially, the investment thesis for Ali, Baba was very
convincing. We had people like, like Charlie
Munger a legendary investor that piled money into Ali.
Baba, at a much higher, share price.
I bought in at a lower price than Charlie, Munger and he was
Missive of any of the concerns. You said that people were wrong
on China and that ultimately he'll be proven, right?
We also had people like mohnish, pabrai pile money into this
investment. A concentrated portfolio into
it. He swapped out later on for Ten
Cent, but the point remains he remains bullish on Ali.
Baba. So you have these value
investors that are very influential piling money into
this company and it caused a lot of people in the community to
look further at this company and see if there's any value there.
Now, I did that. I looked at Ali Baba, I looked
at the investment thesis and I found it be a fundamentally
strong company, that was growing quickly.
And the metrics show that it was undervalued.
There is also some ancillary concerns, there's things going
on with China, but my thought was that those were probably
overblown. So I did follow and allocate a
portion of my portfolio into this investment and that's
obviously so far been a mistake. So, I think it's time that we do
one update on Ali. Baba, I think the time is long
overdue, and what I plan on doing is Breaking this down into
two different categories, the non fundamentals, these are
things that aren't directly related to the company, but
they're things that are relevant, they affect the
company and then we have the fundamentals of Ali.
Baba. I'll be giving a full overview
of that as well, and I think that this will paint a very full
picture of how this investment stands right now.
So let's go ahead and Jump Right In.
Now the first thing that I'll mention that's quite obvious is
Ali. Baba is in a significant
downtrend. If we look at the dip finder,
which is a tool All available to patrons at tracks movement of
companies, it shows that Ali Baba is down. 45% below its
200-day, simple moving average, which means that the company is
in a significant dip. It's been treating downwards and
it's right there next to companies, like Spotify, which
is also in a significant dip. And it's Facebook, which again
is also in a significant dip, it's around 50 percent down from
Saul time highs. So Ali, Baba isn't the only
company. Of course, being sold off right
now, but it is a very significant Off and being down,
45% below your 200, a moving average.
That means there is an incredible amount of negative
momentum in this company. That's also Illustrated through
the stock price. Check this out, this is Ali
Baba, stock price all time, it's down seven point six five
percent from IPO. So, I peeled back in, let's see,
September 19th of 2014, and if you would have purchased Ali
Baba at IPO, you would currently be in the red.
If you just held the entire I'm the only time that you could
really be in the green is if you bought in the 60s and 70s and
2016 and late 2015. So that's the only time
currently it's at eighty, six dollars a share.
It's just incredibly devastating almost.
Every investor I have to assume is in the red in this company
probably 95% Plus or in the red and the majority of them that
purchased it, like 2018 and Beyond are deep in the red 40,
50 percent plus. So if you're in the red and Ali
Baba, In Good Company. There's a lot of other people in
the same situation. So investors are fleeing Ali,
Baba. Another thing that we can look
at to illustrate, this is the price to sales multiple that
this company trades that when an IP owed right here, you probably
can't see it, but it says, 19 and 20 price to sales the next
12 months. Price to sales was a 19 or 20,
that means, Ali Baba was trading at a price multiplied by 20
times. Their next 12 months sales, so
pretty high. T'pel to put that in context,
Amazon trades a day 3.1 price to sales.
So investors are paying three point one times their next 12
months sales. So Ali Baba was trading at a 20
that's came all the way down over the past couple of years to
a 1.6 from a 22, a 1.6. Now normally you expect
contraction in this multiple over time as the company matures
it was never going to maintain a 20 price to sales but to see it
contract this Massively is what the surprise is.
You think it would come down from a 22 maybe like a seven or
an eight right now you know not a 1.6.
That's a lower price to sales and Amazon around half.
So investors are selling out of this company and multiples are
Contracting. Now, let's go ahead and figure
out why. What's going on with this
company? Let's try to get an accurate
view of what the current state of Ali.
Baba is let's start off with a non fundamental things going on
right now, we have a risk of the list.
Ting. This is probably the most recent
event that I think has spurred a lot of selling right here from
the SEC. We have the holding foreign
companies accountable act, since Chinese companies are foreign
companies being listed on us exchanges and available on us
exchanges, the SEC is trying to say, hey Chinese companies.
You have to be able to give us all the documents and access to
all your accounting that us companies do so that us
investors are protected, so they know what they're buying, they
know what they're being invested in and a lot of Chinese
companies. We'll try to avoid this, they
won't give the same amount of documents, you know, this is
kind of a back and forth between China and the US is the Privacy
issue and getting access to these documents.
Well, this was renewed when they came out and listed five
companies that they actually plan on delisting.
They said the ACT requires foreign companies to make
documents available for accounting purposes and delist
them if they can't meet the requirements.
That's the basics of it. The preliminary list of five
companies that the A sec listed out, includes be Xin, Zhao, lab,
hutchman, and young, China, and a CM.
So these five companies which are not Ali.
Baba are the ones that are initially outlined as going to
be the listed if they can't come up with this information.
Now, just because these companies were listed, doesn't
mean that it only affects these companies, a lot of investors
took this as a signal, that Ali, Baba and JD, and all the other
Chinese companies are next. So, even though these ones are
directly, Stood, disaffected, every Chinese company listed on
a u.s. stock and especially the big ones, like Ali Baba.
So this is one of the most recent reasons right now, why
Ali, Baba's being liquidated being sold off the risk of
delisting, a lot of investors just don't want to deal with
this. And it seems it seems as though
the risk of delisting is actually increasing over time,
it's not being minimized or going away.
The initial thesis I had on Ali. Baba is yes, there's a risk of
delisting but that's probably going to subside.
It will Abate over Time investors will forget about
that. You know the relationship with
China will go on. We have so many companies doing
business with them like Nike and Disney and, you know, apple and
so much connection with them already that I thought that this
tension between listings was a little bit overblown.
Well, looks like that may actually be incorrect.
A lot of investors are becoming increasingly concerned about the
risk of delisting. Now one thing to note on this
subject is there are still analyst saying that there is a
risk of delisting, but it's still being overblown by Market
to markets overreacting. We have Citigroup analyst Alicia
saying the market is overreacting, quote, we maintain
our view that the SEC update is not new news, and any real risk
of adrc listing will likely materialized by 2024 to 2025,
when companies failed to disclose the requirements
mandated by the SEC for three consecutive years.
So Alicia at Citigroup still believes that this this is an
over reaction. She believes the market is
overreacting And the real risk of a DRS, delisting Still
Remains very unlikely. So we have the risk of delisting
and whether or not the markets overreacting or under-reacting,
either way, a perceived risk still affects the stock price.
So this is certainly affecting the stock price in a negative
way. Now, the next thing that I look
at is China's economy is undoubtedly, sawing every single
piece of data, I look at is that China's economy is it's slowing
down, it's not growing as fast. Now, there's different things
that we can look at, but here's Here's what's going on right
now. Construction and property sales
have slumped small businesses have shut because of rising
costs and week. Sales debt-laden, local
governments are cutting. The pay of civil servants.
Chinese Chinese economy, slowed markedly in the final months of
last year as a government measures to limit, real estate
speculation, hurt other sectors as well lockdowns and travel
restrictions to contain the coronavirus.
Also dented consumer spending stringent regulations on
everything from internet businesses to after-school
tutoring. These also have set off waves of
layoffs. There is a compounding effect of
a weak economy hair and I could go on and on about this subject
bond yields are completely slumping.
Real estate deals aren't happening in China.
Consumers, don't have as deep pockets as they do in the US and
this does affect Ali. Baba, keep in mind, that Ali
Baba is a consumer company, they're heavy in the Chinese
market. So if the Chinese market is
slowing and people are starting to fill poor there, they're not
going to be spending as much money which will Effect Ali,
Baba sales. So even though this isn't
directly a fundamental of Ali, Baba itself is directly relevant
this influences Ali, Baba's growth.
This is the market, they're operating in and then the last
thing that we can look at is global, tensions are rising now.
Of course, we have Russia invading Ukraine.
This is shifted Dynamics and the global world, right?
The global World Order. Russia has become like more of a
pariah than they've ever been. The entire modern world has
basically said, Ed, we're not doing business with you, we
don't approve of what you're doing and where economically
attacking you. So that's caused an interesting
dynamic because China is one of the only rare sort of allies
with Russia. I wouldn't say that they're
teamed up like the, you know, like the UK in the u.s. right
there. Not that type of Ale, they're
not like Cannon, the us but they are kind of Frenemies.
They like each other because they share in the same type of
economic enemies and even though I don't think China totally
trust Russia or vice versa. Are on that, that side of
things. And I think that this creates
also an interesting Dynamic with China.
I think the events with Russia and Ukraine, and the
relationship with China and the rest of the world has obviously
caused more tensions between China, and the US.
So even though China hasn't done anything too dramatic, they
haven't made any big moves, like invading Taiwan or doing
anything like that. Just the relationship with
Russia and being friendly with them.
I think has caused more tension with China and the rest of the
world. So, This is another compounding
- relationship and negative effect with the rest of these
non-fundamental stuff. This has nothing to do with the
fundamentals of Ali Baba. But all of this is affecting the
stock price of Ali Baba. So it's important to factor in.
All of these have a compounding effect.
The risk of delisting Chinese economy is slowing right now and
Global tensions Rising. It's just different things that
get investors uneasy about this stock and lead to selling so now
that we've set the stage and looked at some of the
non-fundamental, Affecting the stock price of Ali.
Baba. Let's go ahead and look at some
of the fundamental developments of this company over the past
five years. First of all, we can start off
with the growth. The growth is slowing and not
only is it slowing? The growth is just slow it
subjectively slow, and this is a change in the thesis of Ali
Baba. If you went back a couple years,
Ali Baba was an investment in the fast-growing Chinese
e-commerce, Giant and fin tech company in the fast-growing
Chinese economy. Reading was fast-growing.
Now we compare this recent quarter to the history of Ali,
Baba and Ali Baba historically grew at rates up 30% plus look
at it over the past couple of years, it was consistently
growing at 30% 20%, sometimes they even got as high as to 70%
Revenue growth in 1/4. This was a fast growing company
and now it's slow down to rates of 10 percent.
That's a disappointment. And one thing that you'll find
is any time a company has rapidly decelerate and growth.
Typically Stock price goes down. If there is a rapid deceleration
and growth the stock price goes down and the growth rate of Ali
Baba has decelerate and rapidly. Now, the next thing that we can
add to the list of fundamental developments is Ali Baba is
losing market share and they're losing it faster than investors
expected investors. Kind of look to Ali Baba
initially as big Tech in China and as we know in big Tech in
the u.s., they don't really lose market, share that quickly.
Like Amazon has kept their market, share apples, kept their
market share R, Google's kept their market share Ali.
Baba, is losing their market share and they cite Fierce
competition. Competitors in China are
evolving aggressively causing Ali, Baba to lose market, share
as consumers shift from targeted, product searches to
browsing an interaction Ali. Baba's shares of China, retail
e-commerce Market has fallen to a projected 51% from 78% in
2015. Now in my opinion you should
expect market share to be lost. It's not like one company's
going to keep 78%. Ever, but I think the rate at
which they're losing market, share is faster than investors
expected. So as they're, they're also
losing market share on top of Revenue growth.
Slowing stock price is going down.
Now, the next fundamental development we can look at is
that the margins are shrinking. Simply put if we look at the
operating margins or any of the margins of the company, they're
shrinking and they're shrinking, pretty consistently.
And this again, is somewhat surprising to investors.
They had Ali Baba, as a very consistently, high margin
company and the margins are now steadily, Going down.
So you look at this and you compare it to other companies
and you think what's going on with the company?
It has Revenue growth is slowing.
Its losing market share rapidly in the margins of the company
are shrinking. These are not good.
Fundamental developments. Now, the next thing that we can
look at is we have an additional issue, which is Ali, Baba's,
operating spend the amount of money that they spend on sales
and marketing, and general administrative cost that's going
up, pretty rapidly. You can look at the chart here
quarter-over-quarter, every single quarter Ali, A spending
more and more on their sales and marketing, and general,
administrative costs. And it's going up at an
accelerated Pace, but the revenue growth, and the other
metrics aren't following this. Typically, if a company spends
more and more on sales and marketing, their revenue growth
is following their growing very rapidly but you're seeing a
deceleration and revenue growth and you're seeing an increase an
acceleration in their spend. So that's another thing that's
not really good with the development of this company.
Now, the last fundamental development that I think is
important to highlight, is that At the earnings of the company,
the earnings of the company, which everybody sites is the
reason that they're investing in the company, they cite the PE
Ratio. They say it's trading at a 12
PE, look how cheap it is. Ali Baba is a 12 PE and there's
companies in the US that are trading at 25 and 35 PE.
So Ali, Baba is cheap by contrast.
Well, the P/E ratios based on the earnings per share and the
earnings per share growth of Ali.
Baba has been very slow last quarter, it was - which it was
expected to be negative, but it's still not.
Had to have a - EPs and if we even look at the recent history,
the earnings per share growth of the company.
If there is any has been very unimpressive Ali, Baba's not
growing their earnings as much as I would expect and as much as
other investors would expect. In fact if we look at the future
analyst, expectations of their earnings growth from 2022 to
2023, it's only 10 percent, 10 percent, earnings growth, 10
percent earnings growth is very slow earnings growth for
accompanying the stage of Ali Baba.
So, if you're one of the investors just Inking on the
earnings going up rapidly. That story might not play out as
well. The future expected earnings,
growth is very moderate in my opinion, slow for this company.
Now, looking at this overall, does this give you a better
picture of what's going on with the company?
And the reason, the share price is going down.
It has slowing Revenue growth, in fact rapidly to celebrating
its losing market. Share the margins are shrinking
on the company. The operating spent is
increasing, and the earnings growth leaves.
A lot to be desired. Compare this against any US
tech. Compared against Apple, Apple
has very consistent margins. They're not shrinking Apple.
Apple's operating spend matches their business growth.
It's not growing faster than their revenue apples.
Apples Revenue, growth is not rapidly to celebrating, it's
very consistent, right? The continue to have pretty
standard Revenue growth, Apple's earnings growth remains very
solid faster than Ali Baba's and you could do the same exercise
with any other tech company or any company in general, if any
company has these type of fundamental development Hence
stock price is going to go down. Ali, Baba is no exception, it
has poor fundamental developments and the stock price
is going down as a consequence now, add onto that list, the
non-fundamental developments that are unique to China.
And I think this is where you get the massive sell-off.
So these very poor fundamental developments in combination of
these non-fundamental extra risks in China.
I think make for this unique cocktail of the Steep sell-off,
so so far you're saying Joseph. This is a depressing video as
Shareholder of Ali. Baba.
And I know it might come off that way.
I don't want to be just a depressing video.
I'm trying to give the truth here and accurate representation
of what's going on. I'm not trying to just get out
the pom-poms and chair on Ali. Baba and say that the market is
stupid, right? It's not always the case that
the market is dumb, there's a lot of issues that Ali Baba's
facing. The question is, what do we do
in this situation? What do we do now?
Well, I can tell you at least what I plan on doing personally,
I believe strongly that the fundamental issues with Ali
Baba. You are largely a direct result
of the issues in the Chinese economy and I think that the
Chinese economy and the issues it's facing right now, are
largely temporary. I think that they will
eventually get over covid and there's zero tolerance policy.
I think that travel will resume and I think that the real estate
issues are facing as well, will eventually be resolved.
So, my thesis remains that the Chinese economy will eventually
recover and if that happens, if Chinese economy goes back into
growth mode, I think a Of these fundamentals will continue to
tick up words, they'll actually re-accelerate.
So this is just a game of probabilities and I think that's
the way that you look at it. If you think there's a decent
chance that the Chinese economy will re accelerate and get over
the slump. It's in.
Then Ali, Baba might be a good investment.
It's at a very low price, it has many risks already priced into
it and if any good news, happens re acceleration, there's
probably upside to the company. If you think that there's a high
chance that the Chinese economy will never be As fast as it was,
it will never grow to the same extent.
It was and it will be in a slump for like, the next decade.
Then Ali Baba is probably not the company to own.
It has an enormous amount of exposure to the Chinese economy.
So that's the way that I look at it.
I think there's still a lot of upside with the company right
now, especially how much the price has come down, but I also
know there's a lot of risk in this holding so I am not going
to be piling more and more money into Ali.
Baba, I want to control the amount of exposure, I have to it
and even though I'm holding my shares and I There is upside, I
realize there's still a lot of risk left with it, so that's my
thoughts overall. And I hope you enjoyed this
overview of Ali. Baba, if you like this type of
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