Alibaba (BABA) - Q4 Earnings

Investment Analysis Clubs Saul’s Investing Discussions
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For some reason, posters on this board don’t invest in non-US stocks but since this is a place to discuss high growth stocks, I’m highlighting Alibaba’s operating results :

a. Revenue growth of 41% YOY to $17.057 billion

b. Revenue from core commerce UP 40% YOY

c. Revenue from cloud computing UP 84% YOY

d. Revenue from innovation initiatives and others increased 73% YOY

e. Mobile MAU’s on Chinese retail marketplaces reached 699 million (UP 33 million YOY)

f. Net income UP 33% YOY

Since the trade war began in Jan '18, the media has been warning about China’s economic problems and many pundits have been forecasting a ‘hard landing’ in the world’s 2nd largest economy.

The bearish chatter notwithstanding, Alibaba’s Q4 operating results are stellar!

Although top-line growth has slowed down sequentually (54% growth in Q3), during the most recent quarter, this gigantic e commerce business still managed to grow its revenue by a mind boggling 41%!

For the sake of comparison, despite robust economic conditions in the US, its e commerce giant (Amazon) grew its top-line by just 29% in Q3 2018!

Many on this board have sworn to avoid foreign/Chinese stocks; but in my view, they are missing out because today’s valuations are very compelling and should provide investors prodigious returns over the next few years.

Alibaba is an extremely dominant business which is involved in e commerce, retail, mobile payments, cloud computing, advertising, video streaming, insurance, money market funds etc. Furthermore, for years now, it has been investing tens of billions of dollars in overseas disruptive companies and the business is now akin to a diversified mutual fund - a modern day tech conglomerate.

Alibaba is a 5% position for me and I also have positions in a few other high growth Chinese companies (BZUN, WB, TCEHY, IQ, TME, EDU) and others which are listed in Hong Kong.

If you’d like to discuss Alibaba or the above high growth stocks, feel free to start a thread.

Best,

GM

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Agree GM - these results are outstanding with top and bottom line expansion notwithstanding their massive investment plays. I’m comfortable with BABA being a top 5 holding for me.
Ant

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People have been burned on the Chinese stocks. But from your vantage point, you may get some to reconsider.

From a Macro point of view this is a logical investment. From a business fundamental, legal point of view it is a speculation.

However, let me review a couple of things for the people who refuse to invest in not America. (I am one at this time, but could change my mind.)

China GDP is now approaching the GDP of the United States on a U.S. Dollar basis. It has exceeded the U.S. GDP on purchasing power basis. Yes, you can put your big foam finger away now.

China has about 240 million automobiles, the United States about 260 million. China is adding cars at a 10 percent growth rate and should pass the United States with the number of cars on the road.

China has a population growth od .4 percent and a GDP growth of over 6 percent. As you would expect that people would break even, a growth of .4 percent is required, everything above that goes to some sort of wealth.

Compared to the United States with a GDP growth of under 3 percent and a population growth of .75 percent. So the real GDP growth rate in the U.S. is close to 2 percent and the real growth in in China is above 5 percent. As the GDP s are about the same, the real dollar amount available to be made in China is at least twice that of the United States.

Cheers
Qazulight

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Ant,

Agree with your assessment, we both have exposure to China; it will be interesting to see how this plays out.

Qazulight,

You are very right, China’s population is massive and hundreds of millions are still not even connected to the internet. Even I was burnt my the reverse merger scams in 2010-2012 but looking back, those companies had scam written all over it : tiny market caps, no analyst coverage and zero institutional sponsorship.

The current crop of Chinese ADRs are large/mega cap companies and the risk of them being outright scams is much lower in my view.

Best of all, these companies are now trading at 1 to 1.25 PEG ratios which is very cheap and it appears as though China bottomed out in October.

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I hold BABA, IQ TCEHY and JMHLY (which I mentally call a Chinese stock), but I track them separately as they march to different drummer than the American high-fliers and are subject to a different set of geopolitical and domestic threats as well.

I am not as focused as Saul on a single theme to make money. I both appreciate and follow his lead as a function of a large chunk of my overall equity strategy. I also am very aware of my failing - that I love to win, but I hate losing even more - so I’m willing to sub-optimize as long as (hopefully) each day my portfolio beats both the S&P and Nasdaq (today, for example, the particular mix of “Saul” stocks I own were up 2.96%, the S&P about 1.58% and my overall equity portfolio 2.33%). At this stage of the game, I’m not swinging at the fences, but am willing to keep hitting a constant stream of base hits.

Anyhow, long story made short, a number of the major Chinese players are valuable to consider adding to portfolios, much for the same reason that the ones commonly discussed here are, but they lack of transparency into their domestic risks and the potential for unexpected external forces (US tariffs, US sanctions, or whatever) forces us to discount them from prices that we would assign to the stocks here (which means the math used to evaluate them is more probabilistic to find appropriate metrics) and there are probably better venues to discuss many of them.

Jeff

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Agreed Jeff; personally, I don’t like to put all my eggs in one sector.

I used to do that up until a few years ago but then learnt my lesson when a big bet didn’t work out.

Yes, China’s accounting is more opaque than the American companies but I think their prominent companies are legitimate businesses and there is no chance Beijing will suddenly nationalise these and wipe out hundreds of billions of shareholder wealth.

The political and economic ramifications will be too great; such a move will send out a terrible message and ruin China’s reputation and its own economy (due to retaliation from the international community).

Over the past several years, many Chinese stocks have produced 20-40% CAGR for investors and there is no reason to believe this will not continue (especially at the current valuations).

Roughly 35% of my portfolio is now invested in Chinese stocks and the weekly charts suggest that most of them bottomed out in October.

Time will tell…

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If you didn’t learn anything by Musk’s recent dog and pony show in a Field of Mud in China, then you might want to watch this trailer which, I hope, gets you to watch the whole film:

https://youtu.be/55892jT06aI

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The political and economic ramifications will be too great; such a move will send out a terrible message and ruin China’s reputation and its own economy (due to retaliation from the international community).

While not nationalization, didn’t China recently clamp down on the time their youth could spend online gaming? They don’t seem hesitant to use heavy handed tactics to the detriment of their own home grown companies.
https://www.cnn.com/2018/10/16/tech/tencent-china-games-valu…

Rob

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Here are the ANNUALISED of the various China stocks listed in the US (since IPO) -

TCEHY - 37% CAGR since 2008
BABA - 15% CAGR since 2014
NTES - 27% CAGR since 2000
BZUN - 58% CAGR since 2015
BIDU - 25% CAGR since 2005
EDU - 23% CAGR since 2006
TAL - 33% CAGR since 2010
ATHM - 14% CAGR since 2013
WB - 26% CAGR since 2014
VIPS - 51% CAGR since 2012

The above companies have produced such high annualised returns for several years and this is despite the fact that their stock prices are currently off 30-50% from their all-time highs and their current PEG ratios are between 1-1.25.

For instance, $10,000 invested in NetEase (NTES) in 2000 is now worth $794,776 (80 bagger)!

In addition to the above names, a number of new IPOs have recently come out (IQ, TME, HUYA, BILI, NIO etc) which also hold tremendous long-term potential.

Most American companies would kill for such annualised returns!

The proof is in the pudding as they say.

Best,

GM

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Rob,

The Chinese government uses a “top down” approach (central planning) when managing the country.

This is very different than the American way.

China has added risks when compared to American companies but despite these, many ADRs have produced fantastic long term returns!

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For those who didn’t see the film mentioned above, here is a comment from the YT trailer, which reflects a fairly widely held opinion:

Ch Zh
4 months ago
I am from China. That’s why I never invested in Chinese stock market, nor did I buy any stock in US that has any relationship with China. The corruption, dishonesty, lawlessness and cruelty in Chinese businesses are far more than Americans can imagine. You just won’t believe it if you are just told.?

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The China Hustle discusses the micro/small cap reverse merger scams which popped up between 2010-2012. They were indeed scams.

However, this does not imply that all Chinese companies are scams and all Chinese people are crooks.

Just because Enron and Madoff were scams, does this make all American companies/people scams and crooks?

Obviously not!

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I am from China. That’s why I never invested in Chinese stock market, nor did I buy any stock in US that has any relationship with China.
I would be surprised if you had even 1 stock that doesn’t have an exposure to China and China relationships (markets/customers/suppliers etc).
The corruption, dishonesty, lawlessness and cruelty in Chinese businesses are far more than Americans can imagine. You just won’t believe it if you are just told.?
Possibly so - and my money then would be on the winning Chinese companies succeeding in China rather than US companies.
However, this does not imply that all Chinese companies are scams and all Chinese people are crooks.
Just because Enron and Madoff were scams, does this make all American companies/people scams and crooks?
So true GM but this has been a moot point on this board.

There’s no compulsion for folks to invest or avoid China however there’s opportunity and risk for those prepared to consider.

Returning to Ali Baba…

Effectively what you have is an undervalued company growing much faster (>40%) than any mega corp in the world.

I would not be surprised if Ali Baba becomes the first company to a $10 trillion valuation.

Its share of the domestic China eCommerce, cloud & fintech payments is a multi $ trillion franchise even in today’s context - and no-one is going to displace it in China (a more remote scenario than Amazon being displaced in US).

Its India play (the World’s fastest growing major economy and almost equal largest populous nation), in payments with PayTM, Snapdeal & bigbasket ecommerce, cloud services & Zomato is probably another potential $ trillion franchise in the making.

Its rest of world ecommerce & cloud play from SE Asia (twice the size of US population and growing 2x US) to Russia to Europe, Africa and LatAm is potentially another $ trillion franchise.

Then add all its investment fund plays and you have incredible value creation… all for half the price of Amazon and Amazon has US and Canada and UK and a sprinkling here and there.

I can see Ali Baba very easily achieving 10x from here in a not too distant future.

Ant

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Two risks I see in China right now would be the geopolitical tensions between the US and China and the lack of transparency in Chinese companies.

So how does one negate these risks and still capitalize on the rise of the Chinese middle class?

The answer is simple, invest in companies who are neither Chinese nor American who do lots of business in China.

I have been meaning to look into a Japanese company, Pigeon Corp. They make high end baby bottles and newly affluent Chinese love the high quality Japanese product. Could be a long term winner.

And the ace is when you can find a company that is going to benefit from the rise of both India and China.

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Hi guys. This thread is really getting off the top of growth stocks, and into the merits of China and even political implications! Please end it.

Thanks,
Bear
Board Deputy

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Hi guys. This thread is really getting off the top of growth stocks, and into the merits of China and even political implications! Please end it.

I agree with Bear. We’ve had over 15 posts now on the thread, and it’s mostly macro issues now. This board is for discussing individual high growth companies. LET’S END THE THREAD.
Thanks for your cooperation.
Saul

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