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  • Writer's pictureIshfaaq Peerally

Is Alibaba Stock a Buy?

📉 In 2016, Apple $AAPL was in a bear market while the rest of the tech stocks were doing great, I bought Apple. In 2018, the same thing happened to Facebook $FB and I bought Facebook. Today, Alibaba $BABA is in a similar situation. Is it time to buy Alibaba?

🇨🇳 The troubles for Alibaba started when Chinese President Xi Jinping personally halted the IPO of Ant Financials, an affiliate of Alibaba founded by Jack Ma. Then, the Chinese Government started an antitrust probe against Alibaba. Jack Ma was also keeping low for sometime.

💪 Should we be worried? This is just a powerplay. The aim of China is to become a superpower and they cannot sacrifice their main technology company. Most likely, we're going to see a compromise.

🛒 Unlike Amazon $AMZN , Alibaba is not really a retailer but a marketplace. That's why they can keep higher profit margins (22% vs 4% for Amazon). 86% of revenues come from their ecommerce business and they have 18% of market share of all retail in China. In the TTM, sales of Alibaba increased by 10% in China and 50% internationally. Alibaba is also a tech company and very diversified with fintech, cloud, web browser, amongst others.

💸 In the last 5 years, revenues grew by 40% per year and FCF by 26% per year with a good balance sheet. The company is expected to keep growing at fast rate.

💰 Is a $600 billion valuation justified? Compared to US tech stocks, it is undervalued. There's the risk that it is in China and has a VIE structure, but still, it is is undervalued. The risk in the stock, however, is that it is a growth stock (the value is in the future growth rather than in the present business) and we don't know for how long the market will keep such high valuations on growth stocks. In 2000, Microsoft stock $MSFT crashed and it took 16 years for it to recover although in the meantime, the business was still growing. I believe we need a bigger margin of safety before investing in Alibaba.

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Here's the full analysis of Alibaba:


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