Being Greedy with Alibaba
At sub HKD 160 / share, it is cheap if it keeps growing at 20% a year for 5 years.
I first wrote about Alibaba here.
Many better qualified and talented people have bull and bear thesis’ for Alibaba. Hit that link and scroll to the bottom for their deep dives on Alibaba.
The purpose of this post is to present you some numbers. If the numbers speak to you (as they have spoken to me), Alibaba is buy.
Let’s run through some numbers. I’ll cover 3 possible numbers for each of the following. Each number is annualised and we run the numbers for 7 years :
Revenue Growth : 15%, 20% or 25%
Share change per year : 1%, 0.5% or 0%
Net Income % : 18%, 20% or 22%
FCF Yield : 18%, 20% or 22%
P/E Ratio at Year 7 : 14, 16 or 18
Price / FCF Ratio at Year 7 : 14, 16 or 18
Desired Annual Return : 15%, 12.5%, 10%
If you run an analysis, you will end up with the following set of price outcomes per share :
HKD 155 (Low)
HKD 290 (Mid)
HKD 540 (High)
The share price for Alibaba is currently at HKD 158 (22nd August 2021). This price reflects the following outcome for the next 7 years :
Alibaba will grow at 15% / year
Earn 18% Net Income on revenue
Generate 18% Free Cash Flow on revenue
Have its P/E and P/FCF ratio contract to 14x
And give you 15% return per annum
Shares dilute 1% a year
The reality today :
Alibaba is growing at 40% a year
Earns 20% Net Income on Revenue
Generates 26% Free Cash Flow Yield on Revenue
P/E Ratio is : 19x
P/FCF Ratio is : 18x
Alibaba has announced a $15bn share buy back program (3% of current market cap).
What does all this mean?
With sandbagged growth, 1% dilution per year and a contracting P/E & P/FCF ratio (despite trading at higher ratios historically), Alibaba easily gives you a 15% return per year at today’s price of HK$ 158.
If you believe Alibaba can grow faster than 15% a year, you will likely earn more than 15% a year.
If you believe Alibaba reduces outstanding shares, returns increase even more.
And if you believe multiples don’t contract and even expand, your returns will be much more than the above.
And this is why I am buying Alibaba heavily. My average purchase price is HK$ 207 and I am continuing to buy.
What about “China Risk”?
I believe the risk of Alibaba devaluing and staying devalued for 20 years despite steadily improving fundamentals is low. I don’t believe a tightening regulatory environment will curb Alibaba’s ability to grow its fundamentals.
What would be a red flag is if the Chinese consumer’s purchasing power erodes over time. But this is offset by Alibaba’s (specifically Aliexpress’) rapid international growth in the EU, LATAM etc.
Legal Disclaimer : This post is opinion and not investment advice. The author is not a licensed financial advisor and merely some guy writing stuff on the internet. The author is not liable for any investment loss the reader (you) incur from acting on information written by the author.