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  • Writer's pictureIshfaaq Peerally

ALIBABA STOCK ANALYSIS - Largest Chinese Company ๐Ÿ‡จ๐Ÿ‡ณ

The main news of the day is the US airstrike which killed an Iranian commander. This may create conflicts in the region and Iran may retaliate (what are they going to do? Burn Us flags?). Anyway, the fear of conflict caused $OIL prices to rise and the stock markets to open lower. The $SPX500 opened by nearly 0.9% down today. The good news is that we have a portfolio ready to deal with such type of situation. We are down by only about 0.1% with big gains from our oil stocks $CXO and $PE as well as our $GOLD miner $POLY.L . This is a prime example of why you need to have uncorrelated securities in your portfolio.

Another important thing to mention is why a stock such as $AAPL is down by over 0.5% today. Does tensions between the US and Iran affect iPhone sales? I don't think so. And people say that the market is efficient. The reason why Apple is down is because there are so many index funds and ETFs which own it and when there is a selloff, it will be hit. As a good investor, you should ignore all these noises and focus on buying great companies at great prices.

ALIBABA STOCK ANALYSIS - Largest Chinese Company ๐Ÿ‡จ๐Ÿ‡ณ

Alibaba $BABA is the largest company in China and seventh in the world. What are they exactly? A retailer or a tech company? Are they the Amazon $AMZN of China? The eBay $EBAY of China? Actually, Alibaba has a very diversified business but mostly, they would be the eBay of China. Alibaba, just like eBay doesn't hold any inventory and is only a marketplace to connect buyers and sellers. 86% of their revenues come from retail.

Unlike the average retailer, Alibaba has quite a high profit margin(EBITDA margin) of 28%. The retail business alone has a profit margin of 42% while Amazon has a profit margin of 13% and Walmart $WMT 6%. They are one of the most profitable retailers. Last year, there net profits were twice as big as Amazon.

Alibaba is also a technology company. They have a cloud computing business, they own one of the largest web browsers in China, UC Browser. Unlike Amazon, which is now focusing more on cloud computing than retail, Alibaba remains a retailer. Retail is their only profitable segment.

The biggest risk with Alibaba is that you cannot own the shares. The shares being traded on the NYSE are actually ADS (American depositary Shares). This is something normal for most foreign companies. However, in the case of Alibaba, the ADS doesn't give you ownership of Alibaba itself but only a VIE (Variable Interest Entity) incorporated in the Cayman Islands. VIEs are usually created by Chinese companies for multiple reasons so that they can escape Chinese regulators. The Alibaba VIE is only a subsidiary of the main company and if you own the shares of the VIE, you are entitled to the profits by a contract. The risk here is that there is nothing that guarantees this contract. If the Chinese government decides to ban VIE or Alibaba decides not to give its profits to the VIE, there's nothing you can do. You don't have any legal ownership of Alibaba. This is common in China. Even companies such as NIO $NIO uses VIE. I'm not telling you not to invest but you should understand what you're buying.

Alibaba, however, has great fundamentals with a great balance sheet. The revenues and net income of the company has been growing on average by 40% per year. This is a great company and it is actually not that expensive. It is worth the $400 billion valuation. However, for me, it is too expensive. I am making a watchlist of Chinese stocks and unfortunately, Alibaba doesn't make it in the watchlist.

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