The US-China trade row continues with no end in sight. Many stocks have been beaten down because of the uncertainty. Alibaba share price also nose-dived from a recent high of $195 on 3 May 2019 to close at $152 yesterday; that’s a 22% plunge in less than one month! This article examines if it is a good time to own a piece of the e-commerce and cloud computing giant in China and Asia Pacific.
Trade War Analysis
I want to first discuss the probability of a quick resolution to the US-China trade war, after all the recent 22% plunge is triggered primarily by the friction between the world’s 2 largest economies.
From what we know, the Chinese side has stated three “red lines” that pose as sure-stopper to the trade negotiations, the red lines are (1) US keeps existing trade tariffs for a period of time even when there is a trade agreement (2) US can impose punitive trade tariffs unilaterally if it finds China in violation of the trade agreement (3) Beijing must buy more American goods.
Since the trade negotiations broke down, China has ratcheted up nationalism propaganda and President Xi even talked about a new long march, signalling that China may be prepared for a long-drawn full-blown trade war with US even though many of the elites probably are in agreement that this will be a lose-lose position for both China and US, and also the rest of the world.
Trump and Xi may meet separately at the G20 summit in June but would there be a breakthrough? I personally boldly predict there won’t be a quick resolution and any resolution will take many more months’ of negotiations. This means the trade tensions uncertainty will remain for a while, the stock market will not recover to a new high any time soon barring stimulating effect like an interest rate cut. If this prolongs, businesses may hold back capital investments and the real economy may slow down.
Adding to this woe is the inverted yield curve, is an impending economic recession upon us?
Alibaba continues to post hugely impressive growth numbers, both in top line and bottom line. For Fiscal 2019, the total revenue has grown 51% YoY. Cloud computing business from Alibaba Cloud posted an more impressive 84% YoY growth. You can refer to the diagram below to understand the key lines of business Alibaba has.
I am always guided by these simple principles when I determine whether a company is a buy:
- buy businesses which I can understand
- buy businesses with durable competitive advantage (economic moat)
- buy at a price with good margin of safety
Alibaba’s core business is e-commerce with strong branding and tremendous network effect and they are number one in Cloud Computing in Asia Pacific. They continue to invest and innovate through technologies and various business models. This is no doubt a company which I wish to own but question is at what price.
Doing a quick PhD Fundamental Analysis method taught in our class Cashflow Mastery Program, we determine:
FCF/Revenue: 25%, Net Margin: 17%, ROE: 19.85%, ROA: 10.46%
I like these set of numbers.
Looking at debt/equity, interest coverage and cash position, Alibaba definitely has a good balance sheet. There is speculation that Alibaba is seeking a dual listing in Hong Kong, we shall see how it goes but it is definitely a plus and additional funding can augur well in the various investment initiatives in the areas of cloud computing, new retail etc.
Alibaba is still growing tremendously. Earnings growth is slower than revenue growth but this is all because of the investments in new areas of growth and the rewards can be reaped at a later stage.
From a long-term value investing perspective, I think Alibaba is a steal at current price of $152. Using DCF valuation, I estimate fair value of $185 per share, so there is already a margin of safety of 20% at current price.
However, cheap can become cheaper. I personally feel that there is a chance to pick up ownership of this wonderful company at a lower price, especially at levels closer to the recent lows.
Our next run of Cashflow Mastery Program is on 29 & 30 June, with a maximum class size of 20 participants. We are running free workshops on 11th and 13th June, so please come join us and we can learn together to be better investors.
At Journey With Money, we are practitioners of Value Investing for Singapore and US stocks. We are passionate about sharing our Stock Investment knowledge and experience but the materials we present do not constitute stock recommendations and readers are urged to do their own due diligence for any investment decisions.
Do leave us comments and feedback below so we can improve on our contents.
Please also follow us on our Facebook Page.