The More It Falls The More I Buy: 4 Reasons Alibaba Is Set To Fly

Aug. 31, 2021 12:14 PM ETAlibaba Group Holding Limited (BABA)310 Comments


  • The China Tech Crash of 2021 is likely to prove one of the best opportunities for deep value hyper-growth investors in history.
  • Regulatory crackdowns in 2011, 2015, and 2018 resulted in China's tech titans delivering returns as strong as 400% during the next five years.
  • Today, the overwhelming expert consensus, among over 60 analysts, credit rating agencies, bond investors, and leading asset managers is that now is the time to buy China tech.
  • Alibaba is my highest conviction China tech blue-chip recommendation, one that I've personally invested $120,000 into and I have 15 limits set to buy more in case it hasn't yet bottomed.
  • BABA is 54% historically undervalued, and analysts expect it to potentially deliver about 400% returns in the next five years. Even a conservative estimate results in BABA potentially quadrupling your money and outperforming the S&P 500 by about 12X. For anyone comfortable with BABA's complex risk profile, today is the best time in history to buy the tech king of China.
  • This idea was discussed in more depth with members of my private investing community, The Dividend Kings. Learn More »
Heap Of Money
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One of the most dramatic events of 2021 has been the remarkable tech crash in China, triggered by the regulatory crackdown that began in November 2020.

Chinese tech shares fell nearly 60% in a matter of months, and Alibaba (NYSE:BABA), the king of China tech, was cut in half.

I understand that it’s confusing to people who are not close to what’s happening. Since I started going to China 36 years ago, I have found that most Western observers who do not have direct contact with policy makers’ and don’t follow in detail the patterns of the changes have tended to not believe that the Chinese Communist Party’s usage of capital markets to foster development is real.

They interpret moves like these two recent ones as the Communist Party leaders showing their true anti-capitalist stripes even though the trend over the last 40 years has clearly been so strongly toward developing a market economy with capital markets, with entrepreneurs and capitalists becoming rich. As a result, they’ve missed out on what’s going on in China and probably will continue to miss out...

Through it all Chinese policy makers successfully managed the fallout and pursued their goals; i.e., the direction of their actions never changed. It has been in support of a fast and steady development of capital markets, entrepreneurship, and openness to investment to foreign investors. So I encourage you to look at the trends and not misunderstand and over-focus on the wiggles...

Don’t misinterpret these wiggles as changes in trends, and don’t expect this Chinese state-run capitalism to be exactly like Western capitalism.

Having said that, I do think that it is unfortunate that Chinese policy makers don’t publicly communicate the reasoning behind their moves more clearly.

As for investing, as I see it the American and Chinese systems and markets both have opportunities and risks and are likely to compete with each other and diversify each other. Hence they both should be considered as important parts of one’s portfolio. I urge you to not misinterpret these sorts of moves as reversals of the trends that have existed for the last several decades and let that scare you away." - Ray Dalio (emphasis added)

The 40 regulatory announcements (and counting) have naturally caused a lot of concern for foreign investors, many of whom have never completely trusted China's government.

MSCI Inc., the world’s biggest index provider, shook off concerns about the “investability” of Chinese stocks following Beijing’s recent regulatory crackdown, citing previous instances where markets rebounded in the aftermath.

Regulatory compliance has weighed on China “every three, four, five years and obviously the markets have sold off at the time. But very quickly afterward, the markets have recovered and gone through to new heights,” MSCI Inc. Chairman and Chief Executive Officer Henry Fernandez told Bloomberg Television’s Haidi Lun and Shery Ahn in an interview...

“There is a lot of criticism on China in terms of lack of compliance” and the country is now going through a corrective phase, Fernandez said. “Countries go through periods like this.”

Gabriela Santos, a global market strategist at JPMorgan Chase’s asset management unit, also disagrees with the view that China is now uninvestable.

“We had this in 2018, 2015 and 2011 and it’s unrelated to the economic cycle - it’s related to China’s regulatory and reform campaigns,” she said in an interview with Bloomberg Television on Saturday. “It takes time to rebuild confidence, but three months out Chinese equities tend to trend up.” - Yahoo Finance (emphasis added)

Regulators have said this crackdown is expected to last about six months, meaning until the end of 2021. However, this is hardly the first major crackdown we've seen from the Chinese government.

Every few years, Beijing flexes its regulatory muscles and the result for hyper-growth blue-chips like BABA can be dramatic.

BABA Total Returns Since 2015 (Regulatory Crackdowns In 2015, 2018, And 2021)

(Source: Portfolio Visualizer)

Buying BABA during its frequent regulatory crackdown-induced bear markets can result in 38% CAGR returns for the next five years or 5X bagger in five years.

There's no guarantee of course that this time isn't different. In fact, Howard Marks and John Templeton have famously said that about 20% of the time "this time really is different."

Rule number one: most things will prove to be cyclical.

Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.” - Howard Marks

I've been tracking the China tech crash very closely at, with frequent updates about the state of the crackdown and what it likely means for the most popular blue-chip names.

But when it comes to China tech, like Morningstar, Alibaba is my highest conviction recommendation for anyone comfortable with this industry's complex risk profile.

(Source: Dividend King Phoenix Limit Tool)

I've been chasing BABA to bottom, wherever that might finally be, via aggressive limit buys, totaling about $27,000 in recent weeks.

(Source: Dividend Kings Real Money Portfolio Tracker)

I've invested a total of $120,000 into BABA so far, achieving a cost basis of $217, about $10 lower than Charlie Munger.

Alibaba Is Still Charlie Munger's Third Biggest Holding

(Source: WhaleWisdom)

Whose Bullish On China Tech Besides DK?

  • Ray Dalio
  • JPMorgan
  • MSCI
  • Cathie Wood
  • Charlie Munger
  • Mathews Asia
  • Morningstar
  • Thomas Russo/Semper Vic Partners
  • 58/59 analysts covering it on Wall Street (consensus expecting a 72% 12-month rally)
  • bond investors (the "smart money" on Wall Street"

Today, there is just one bearish analyst on BABA, with the overwhelming consensus believing "this too shall pass."

Does that mean that BABA is a guaranteed rich-retirement blue-chip opportunity? No, there's always that 20% chance that "this time really is different."

But when the overwhelming expert consensus all says that BABA likely represents the buying opportunity of a lifetime, well, then a famous Buffett quote comes to mind.

When it's raining gold, reach for a bucket, not a thimble." - Warren Buffett

So let's take a look at the four reasons why Baba is likely set to soar, and too cheap to ignore, assuming you're comfortable with its complex risk profile.

Reason 1: A Hyper-Growth Blue-Chip Likely To Rise Like A Phoenix From This Regulatory Crackdown

We are going through a period when headline risk drives share price... For example, The Wall Street Journal and the Financial Times recently reported that SoftBank (OTCPK:SFTBY), a global leader in Chinese FinTech investing, has recently decided to cut additional investments into the China Tech market until the Chinese technology sector “calms.”

There is...undoubtedly systemic selling by global shareholders to eliminate evidence from their portfolio reports of Alibaba’s recent underperformance...We believe, however, that Alibaba will financially recover from near-term disruptions and once again evidence the extremely crucial role Alibaba has long played in Chinese commerce.

I believe that this is to be the case given the following advantages it possesses – i.e., the financial strength of Alibaba; its dominance in commerce platforms that continue to be indispensable for its manufacturers and merchants; its commitment to invest heavily in new ventures even when such investments cause near-term results to “suffer;” its robust and fast-growing cloud business; and its prospects for enhanced business practices that I believe will arise from many of the very same reforms that are being poorly received by equity investors today." - Thomas Russo, Semper Vic partners

Not all Chinese tech names will survive this crackdown, but BABA is almost certainly likely to be one of them, and here's how I know that.

Balance Sheet Safety

Rating Dividend Kings Safety Score (119 Safety Metric Model) Approximate Dividend Cut Risk (Average Recession)

Approximate Dividend Cut Risk In Pandemic Level Recession

1 (unsafe) 0% to 20% over 4% 16+%
2 (below- average) 21% to 40% over 2% 8% to 16%
3 (average) 41% to 60% 2% 4% to 8%
4 (safe) 61% to 80% 1% 2% to 4%
5 (very safe) 81% to 100% 0.5% 1% to 2%
BABA 75% A+ stable credit ratings from S&P, Fitch, Moody's 0.6% 30-year bankruptcy risk

Long-Term Dependability

Company DK Long-Term Dependability Score Interpretation Points
S&P 500/Industry Average 57% Average Dependability 2
Non-Dependable Companies 27% or below Poor Dependability 1
Relatively Dependable Companies 28% to 68% Below to Above-Average Dependability 2
Very Dependable Companies 69% to 79% Very Dependable 3
Exceptionally Dependable Companies 80% or higher Exceptional Dependability 4
BABA 57% Average Dependability 2

Overall Quality

BABA Final Score Rating
Safety 75% 4/5
Business Model 80% 3/3
Dependability 57% 2/4
Total 67% 9/12 Speculative Blue-Chip

BABA: 423rd Highest Quality Master List Company (Out of 507) = 17th Percentile

(Source: DK Safety & Quality Tool) updated daily, sorted by overall quality

The DK 500 Master List includes the world's highest quality companies including:

  • All dividend champions

  • All dividend aristocrats

  • All dividend kings

  • All global aristocrats (such as BTI, ENB, and NVS)

  • All 12/12 Ultra Swans (as close to perfect quality as exists on Wall Street)

  • 44 of the world's best growth stocks (on its way to 50)

BABA's 67% quality score means it's similar in quality to such 9/12 blue-chips, and 10/12 SWANs as

  • Oracle (ORCL)
  • VICI Properties (VICI) - recent recommendation
  • STAG Industrial (STAG)
  • Iron Mountain (IRM)
  • Walgreens (WBA) - dividend aristocrat
  • American Campus Communities (ACC)
  • McDonald's (MCD) - dividend aristocrat
  • Broadcom (AVGO)
  • Berkshire Hathaway (BRK.A) (BRK.B)

The overall quality scores factor in 207 fundamental metrics covering.

  • dividend safety

  • balance sheet strength

  • short and long-term bankruptcy risk

  • accounting and corporate fraud risk

  • profitability and business model

  • growth consensus estimates

  • cost of capital

  • long-term risk-management (ESG scores and trends from MSCI, Morningstar, S&P, FactSet, and Reuters'/Refinitiv)

  • management quality

  • dividend-friendly corporate culture/income dependability

  • long-term total returns (a Ben Graham sign of quality)

  • analyst consensus long-term return potential

It actually includes over 1,000 metrics if you count everything factored in by 12 rating agencies we use to assess fundamental risk.

Is BABA the highest quality Chinese tech blue-chip? No.

China Tech Stocks Sorted By Quality

Company Balance Sheet Safety Score Quality Score

ESG/Long-Term Risk Management Consensus Industry Percentile

Tencent (OTCPK:TCEHY) 90% 82% 64%
Baidu (BIDU) 76% 73% 49%
UP Fintech Holding (TIGR) 87% 73% NA (JD) 80% 69% 15%
Alibaba (BABA) 75% 67% 24%
Pinduoduo (PDD) (startup) 54% 49% 22%
Average 77% (safe) 69% (speculative blue-chip) 35% (below-average)

Actually, BABA is about average compared to its peers. But as Thomas Russo points out, BABA is the No. 1 tech giant in China, and essential to the daily life of nearly 1 billion people.

Metric 2020 Growth 2021 Growth Consensus 2022 Growth Consensus 2023 Growth Consensus 2024 Growth Consensus

2025 Growth Consensus

Sales 56% 29% 21% 20% 19% 16%
EPS 33% -3% 19% 22% 12% 28%
Owner Earnings (Buffett smoothed out FCF) -3% 162% NA NA NA NA
Operating Cash Flow 34% -2% 28% 9% NA NA
Free Cash Flow 32% -11% 20% 18% NA NA
EBITDA 47% 3% 23% 23% NA NA
EBIT (operating income) -3% 37% 31% 29% NA NA

(Source: FAST Graphs, FactSet Research)

This is why it's expected to not only survive this crackdown but come out of it stronger than ever. Guess who can afford virtually unlimited compliance costs? BABA with its fortress balance sheet and a mountain of cash.

Guess who might not be? Its rival startups such as Pinduoduo (PDD).

BABA Consensus Leverage Forecast

Year Debt/EBITDA Net Debt/EBITDA (3.0 Or Less Safe According To Credit Rating Agencies)

Interest Coverage (8+ Safe)

2020 0.68 -1.79 20.05
2021 0.51 -2.35 13.24
2022 0.41 -2.47 16.68
2023 0.29 -2.53 30.97
2024 0.36 -3.17 40.64
2025 0.26 -3.33 59.47
Annualized Change -17.68% 13.23% 24.29%

(Source: FactSet Research Terminal)

Alibaba's financial strength can't be overstated.

BABA Balance Sheet Consensus Forecast

Year Total Debt (Millions) Cash Net Debt (Millions) Interest Cost (Millions) EBITDA (Millions) Operating Income (Millions)
2020 $20,807 $49,773 -$54,521 $693 $30,497 $13,894.00
2021 $15,952 $75,361 -$73,628 $1,392 $31,267 $18,429.00
2022 $15,952 $103,889 -$95,460 $1,454 $38,571 $24,253.00
2023 $13,557 $134,942 -$119,690 $1,013 $47,326 $31,372.00
2024 $20,635 $218,587 -$184,092 $984 $58,029 $39,990.00
2025 $20,635 $286,831 -$266,196 $984 $80,001 $58,514.00
Annualized Growth -0.17% 41.95% 37.32% 7.26% 21.27% 33.32%

(Source: FactSet Research Terminal)

A $2.8 billion fine it's faced so far represents 4% of last year's profits and less than 4% of its 2021 cash position.

A cash pile that's expected to grow at 42% annually through 2025 and reach nearly $300 billion. For context, Apple's (AAPL) cash pile has never reached such levels.

BABA Credit Rating Consensus

Rating Agency Credit Rating 30-Year Default/Bankruptcy Risk Chance of Losing 100% Of Your Investment 1 In
S&P A+ stable outlook 0.6% 166.7
Fitch A+ stable outlook 0.6% 166.7
Moody's A1 (A+ equivalent) stable outlook 0.6% 166.7
Consensus A+ stable outlook 0.60% 166.7

(Sources: S&P, Fitch, Moody's)

Not one, not two, but all three major US rating agencies consider the possibility of a catastrophic collapse in BABA's fundamentals to be about 0.6%...over the next 30 years.

That equates to a fundamental risk of losing 100% of your investment to bankruptcy of 1 in 167.

(Source: FactSet Research Terminal)

The bond market, the most conservative investors in the world, and the so-called "smart money" on Wall Street are willing to lend to BABA for 40 years at less than 3.5%.

(Source: Gurufocus Premium)

This is one of the strongest balance sheets on earth, confirmed not only by its debt metrics and credit ratings but also advanced accounting metrics such as the F, Z, and M-scores.

(Source: Gurufocus Premium)

  • M-score is 73% accurate at catching accounting fraud
  • including Enron in 2002 when student's at Cornell used it to predict Enron was committing fraud and would soon go bankrupt
  • 82.5% accurate at determining honest accounting
  • there is a significantly below 17.5% chance that BABA is committing accounting fraud, according to M-Score
  • confirmed by all 3 credit rating agencies and PricewaterhouseCoopers Hong Kong

Alibaba has been using GAAP accounting for years, a tougher standard than IFRS (international financial reporting standards) used by most global companies.

That means there's very little chance that Alibaba will be de-listed from US exchanges, even if other Chinese companies are. A risk that appears to be lessening in recent weeks.

China sent its strongest signal yet that it’s serious about resolving a long impasse with the U.S. over access to its companies’ books.

The State Council, China’s top government body, on Monday issued guidelines saying it would boost cross-border accounting cooperation, while also safeguarding its information security. That came on the heels of a statement from the nation’s security regulator, which said it would work on enhancing conditions for cooperation with the U.S. on company audits during the second half of the year." - Bloomberg

While there's no guarantee that BABA isn't cooking its books, there's no statistically significant reason to think that it is. In fact, all the best evidence says we can trust this accounting.

In fact, that also applies to this exceptional management team.

We assess the capital allocation of Alibaba as Exemplary.

The shareholder distribution policy of Alibaba is appropriate with a sound balance sheet...

Return on invested capital for Alibaba has been falling from fiscal 2017's (year ended March) 52% to fiscal 2021’s 23%, as Alibaba is not alone in investing heavily into emerging businesses for future growth at the expense of margin.

Tencent has also seen a reduction in ROIC from 2016’s 26% to 15% in 2020. Alibaba has been enriching its vast ecosystem so we think it is justified.

For the year from April 1, 2020 to May 13, 2021, Alibaba repurchased approximately 1.7 million of ADSs or approximately 13.6 million of ordinary shares or 0.62% of the ordinary shares issued and outstanding as of March 31, 2021, at an average price of USD 218 per ADS, lower than our fair value estimate. Alibaba upsized its share repurchase program, which will be effective for two years through the end of 2022, from USD 6 billion to USD 10 billion (now $15 billion). We think the share repurchase program makes sense as the shares are still undervalued.

We believe management has also done a commendable job investing in businesses to solidify its leadership in e-commerce, cloud, and logistics. For example, Alibaba invested in leading logistic companies and Cainiao to improve the delivery quality of e-commerce goods. It started its cloud business in China early in 2009, earlier than its largest wide-moat competitor Tencent, and commended a share of 41.6% in China’s public cloud services (IaaS and PaaS) in the first half of 2020 as per IDC. We expect the current investment will pay off, with ROIC rising from 16.6% in fiscal 2022 to 21.9% in 2026.

We expect Alibaba’s adjusted EBITA to be flat in fiscal 2022 versus 2021 mainly due to an estimate CNY 15 billion investment into its moaty e-commerce business, which we think is necessary amid heavy investments among its Chinese e-commerce peers.

The areas of investments in descending order are community marketplace and Taobao deal (to target customers in the less developed areas and those who like value-for-money products), local consumer services (to expand to services e-commerce), Lazada, its Southeast Asia e-commerce business.

These investments will go into technology, merchant supports, user acquisition, user experience enhancement, improving supply chain and merchandising for high frequency categories.

We like management’s goal to increase annual active consumers in China by over 100 million versus 85 million achieved in the fiscal year 2021, which is one of the outcomes of the investments. This will further enhance the network effect of wide-moat Alibaba." - Morningstar (emphasis added)

If there's any management team that can navigate these choppy regulatory waters and come out with the growth thesis intact, it's likely Alibaba's.

Does that mean BABA is run by Warren Buffett, a man of nearly incorruptible ethics? Heck no. There are certain corporate governance concerns I highlighted in detail in the risk section of this deep-dive video article.

But when it comes to the question of whether or not BABA's growth story remains intact? The answer, given the best available evidence, is an emphatic "yes."

Reason 2: The Hyper-Growth Investment Thesis Remains Firmly Intact

Alibaba isn't hunkering down like a scared child, it's aggressively investing in its future.

Alibaba’s Strategic Investments Generate Good Metrics

We think wide-moat Alibaba’s strategic investments such as community group purchases (200% quarter-on-quarter increase in gross merchandise value), Taobao Deals (quarterly net add of 40 million annual active buyers) and Idle Fish (over 100 million monthly active users) have demonstrated some good results.

We think these are early indicators that the investments are yielding good growth. We also like that Alibaba increased its share repurchase program from USD 10 billion to USD 15 billion, which is the largest share repurchase program in Alibaba’s history. We think it is sensible given Alibaba is well below our estimate of intrinsic value.

We have made changes to our earnings estimate due to reduced tax subsidies from the government, lowering our EPS estimate by 2% this year.

Our five-year earnings per share CAGR is now 11% versus 12% previously. Alibaba maintained its full-year revenue guidance, and we have left our top line unchanged.

Our fair value estimate for Alibaba is now USD 302 per ADS (HKD 293 per share), down 4%. We think the valuation is compelling. We think the key catalysts are strong metrics of its strategic investments (user and GMV metrics and removal of regulatory overhang, for example).

In the 12 months ended June 2021, the number of active consumers on Alibaba’s China retail marketplaces was 828 million, a net increase of 17 million vs. the previous quarter. For the 12 months ended June 2021, annual active consumers of Taobao Deals grew to over 190 million from 150 million in the prior quarter. This indicates that only 17 million of these 40 million increase of Taobao Deals users were new to Alibaba’s China retail marketplaces, with 23 million of them coming from Tmall, Taobao, or Idle Fish." - Morningstar (emphasis added)

But BABA's doubling down on growth is hardly limited to its legendary VC arm.

BABA Growth Spending Forecast

Year SG&A (Selling, General, Administrative) R&D Capex Total Growth Spending Sales

Growth Spending/Sales

2020 $21,186 $8,868 $6,894 $36,948 $111,130 33.25%
2021 $26,462 $10,153 $9,477 $46,092 $143,156 32.20%
2022 $32,496 $12,255 $10,462 $55,213 $173,470 31.83%
2023 $37,967 $14,912 $12,717 $65,596 $208,293 31.49%
Annualized Growth 21.47% 18.92% 22.64% 21.09% 23.30% -1.79%

(Source: FactSet Research Terminal)

The company is expected to triple growth spending by 2023.

BABA Profit Growth Consensus Forecast

Year Sales FCF EBITDA EBIT (Operating Income) Net Income
2020 $111,130 $25,717 $30,497 $13,894 $23,287
2021 $143,156 $26,934 $31,267 $18,429 $22,068
2022 $173,470 $32,418 $38,571 $24,253 $26,518
2023 $208,293 $32,782 $47,326 $31,372 $33,258
2024 $247,845 $44,485 $58,029 $39,990 $36,137
2025 $288,594 NA $80,001 $58,514 $49,721
Annualized Growth 21.03% 14.68% 21.27% 33.32% 16.38%

(Source: FactSet Research Terminal)

Which is expected to help drive 21% sales growth through 2025 and operating income growth of 33% CAGR.

And let's not forget that a major reason analysts, rating agencies, and bond investors don't expect a worst-case scenario for BABA is the torrents of cash it is sending to Beijing's coffers every year.

BABA Tax Consensus Forecast

Year Operating Income Tax Costs Tax Rate
2020 $13,894.00 $4,536 32.65%
2021 $18,429.00 $5,125 27.81%
2022 $24,253.00 $6,550 27.01%
2023 $31,372.00 $7,414 23.63%
2024 $39,990.00 $11,021 27.56%
2025 $58,514.00 $14,115 24.12%
Annualized Growth 33.32% 25.49% -5.87%

(Source: FactSet Research Terminal)

Why is tobacco still legal in the US? One reason is local and state governments are addicted to its taxes. Well, BABA is expected to pay $48.761 billion in taxes from 2020 through 2025.

And if Beijing doesn't kill the goose laying those incredible golden eggs, then from 2026 through 2030 analysts expect BABA to pay at least $105 billion in taxes.

Does that ensure that President Xi won't go full Mao and try to nationalize BABA? Of course, not. But if he does, then it guarantees that China will never come close to competing with America for the technology of the future.

BABA Buyback Potential

Year Dividend Consensus FCF/Share Consensus Payout Ratio Retained (Post-Dividend) Free Cash Flow Buyback Potential Debt Repayment Potential
2021 $0.00 $9.73 0.0% $26,446 6.08% 165.8%
2022 $0.00 $8.46 0.0% $22,994 5.28% 144.1%
2023 $0.00 $11.33 0.0% $30,795 7.07% 227.2%
2024 $0.00 $13.35 0.0% $36,285 8.34% 175.8%
Total 2021 Through 2024 $0.00 $42.87 0.0% $116,520.66 26.77% 730.45%

(Source: FactSet Research Terminal)

Oh, and let's not forget, the incredible buyback potential that BABA has at the lowest valuations in history.

It has a $15 billion stock repurchase authorization right now, up 50% from last quarter, but over the next few years is expected to retain nearly $120 billion in free cash flow.

That's enough to repurchase over 25% of its stock at wildly accretive levels.

(Source: FactSet Research Terminal)

BABA has a 14.8% to 24.6% CAGR growth consensus range

Smoothing for outliers, 10% margin of error to the downside, and 20% to the upside.

This results in a 13% to 30% CAGR margin-of-error adjusted growth consensus range.

(Source: FAST Graphs, FactSet Research)

In other words, analysts expect the current regulatory crackdown to not slow BABA's growth significantly, just as the 2011, 2015, and 2018 crackdowns didn't.

Reason 3: The Best Valuation In History

BABA certainly isn't right for everyone. Some people will never trust Beijing's regulatory climate. But if you're not buying now, then it means you shouldn't own BABA in your diversified and prudently risk-managed portfolio at all, at any price.

(Source: FAST Graphs, FactSet Research)

  • BABA's historical fair value PE based on billions of investors since its IPO has been 29 through 32
  • including regulatory scares in 2015, 2018, and today

BABA Market-Determined Fair Value

Metric Historical Fair Value Multiples (7-Years) 2021 2022 2023 2024 2025

12-Month Forward Fair Value

Earnings 31.28 $300.18 $358.29 $449.49 $505.17 $645.31
Owner Earnings (Buffett Smoothed Out FCF) 24.57 $571.76 NA NA NA NA
Operating Cash Flow 22.39 $275.21 $351.65 $383.99 NA NA
Free Cash Flow 29.81 $255.73 $307.87 $397.96 NA NA
EBITDA 32.36 $364.52 $448.51 $551.74 NA NA
EBIT (Operating Income) 42.22 $286.44 $376.07 $485.95 NA NA
Average $318.15 $363.07 $445.95 $505.17 $645.31 $347.52
Current Price $159.47

Discount To Fair Value

49.88% 56.08% 64.24% 68.43% 75.29% 54.11%
Upside To Fair Value 99.51% 127.67% 179.64% 216.78% 304.66% 117.92%
2021 PE 2022 PE 2022 Weighted OCF 12-Month Forward OCF 12-Month Average Fair Value Forward PE

Current Forward PE

$9.60 $11.46 $7.49 $10.82 32.1 14.7

BABA is trading at just 14.7X earnings and adjusted for net cash, about 11X.

But what if the market permanently reprices BABA at lower multiples due to the torrent of new regulations?

BABA Conservative Valuation Model

Metric Fair Value Multiples (PEG 1) 2021 2022 2023 2024 2025

12-Month Forward Fair Value

Earnings 24.60 $236.09 $281.80 $353.50 $397.29 $507.50
Owner Earnings (Buffett Smoothed Out FCF) 24.60 $571.76 NA NA NA NA
Operating Cash Flow 22.39 $275.21 $351.65 $383.99 NA NA
Free Cash Flow 24.60 $211.02 $254.06 $328.41 NA NA
EBITDA 24.60 $277.13 $340.99 $419.43 NA NA
EBIT (Operating Income) 24.60 $166.88 $219.09 $283.15 NA NA
Average $250.44 $280.50 $347.37 $397.29 $507.50 $270.09
Current Price $159.47

Discount To Fair Value

36.32% 43.15% 54.09% 59.86% 68.58% 40.96%
Upside To Fair Value 57.04% 75.89% 117.83% 149.13% 218.24% 69.37%
2021 PE 2022 PE 2022 Weighted OCF 12-Month Forward OCF 12-Month Average Fair Value Forward PE

Current Forward PE

$9.60 $11.46 $7.49 $10.82 25.0 14.7

BABA's historical PEG ratio is 1.33. But even if it permanently falls to 1.0, BABA is still about 41% undervalued today.

Analyst Median 12-Month Price Target

Morningstar Fair Value Estimate

$274.81 $302.00 (27.9 PE)

Discount To Price Target (Not A Fair Value Estimate)

Discount To Fair Value

41.97% 47.20%

Upside To Price Target

Upside To Fair Value

72.33% 89.38%

Even using more conservative valuation estimates, the upside potential just to fair value, never mind BABA's future hyper-growth, is enormous.

In fact, today BABA is as close to a perfect speculative hyper-growth blue-chip investment opportunity as exists on Wall Street.

Reason 4: Potentially One Of The Hottest Stocks Of The Next Decade

For context, here's the return potential of the 29% overvalued S&P 500.

S&P 500 2023 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

S&P 500 2026 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

Aristocrats are expected to deliver about 5.8% CAGR returns over the next five years.

And here's what investors buying BABA today can reasonably expect.

  • five-year consensus return potential range: 15% to 36% CAGR

BABA 2023 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

BABA 2023 Consensus Total Return Potential (PEG 1)

(Source: FAST Graphs, FactSet Research)

BABA 2026 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

How do you get a potential 5 bagger over the next five years? By "being greedy when others are fearful" on Alibaba.

BABA 2026 Consensus Total Return Potential (PEG 1)

(Source: FAST Graphs, FactSet Research)

Over the long-term analysts expect:

  • 0% yield + 24.6% growth = 24.6% CAGR total return potential
  • 13% to 30% CAGR range
  • vs 9.9% S&P 500 and 11.2% aristocrats and 16.2% CAGR Nasdaq

BABA Vs. S&P 500 Vs. Aristocrats Inflation-Adjusted Long-Term Return Forecast: $1,000 Investment

Time Frame (Years) 7.9% LT Inflation-Adjusted Returns (S&P Consensus) 9.2% Inflation-Adjusted Returns (Aristocrat consensus) 11.0% CAGR Low-End BABA Range 22.6% BABA Consensus
5 $1,462.54 $1,552.79 $1,685.06 $2,769.83
10 $2,139.02 $2,411.16 $2,839.42 $7,671.93
15 $3,128.40 $3,744.03 $4,784.59 $21,249.91
20 $4,575.40 $5,813.70 $8,062.31 $58,858.53
25 $6,691.69 $9,027.47 $13,585.46 $163,027.83
30 $9,786.86 $14,017.78 $22,892.30 $451,558.59
35 $14,313.66 $21,766.69 $38,574.85 $1,250,738.32
40 $20,934.27 $33,799.13 $65,000.87 $3,464,326.43
45 $30,617.17 $52,483.01 $109,530.24 $9,595,578.40
50 $44,778.78 $81,495.18 $184,564.83 $26,578,074.17

My $120,000 investment in BABA could very well fund my retirement all on its own.

  • eventually, 50% of BABA's future post-tax dividends could fund my retirement
  • my "Jack Ma retirement plan"
Time Frame (Years) Ratio Aristocrats Vs S&P Ratio BABA Low End Of Consensus Growth Range Vs S&P 500

Ratio BABA Consensus Vs S&P

5 1.06 1.15 1.89
10 1.13 1.33 3.59
15 1.20 1.53 6.79
20 1.27 1.76 12.86
25 1.35 2.03 24.36
30 1.43 2.34 46.14
35 1.52 2.69 87.38
40 1.61 3.10 165.49
45 1.71 3.58 313.41
50 1.82 4.12 593.54

Alibaba at today's valuations is the classic example of how you can make your own luck on Wall Street.

Luck is what happens when preparation meets opportunity." - Seneca

BABA Investment Decision Score

Ticker baba DK Quality Rating 9 67% Investment Grade A+
Sector Consumer Discretionary Safety 4 75% Investment Score 100%
Industry Internet & Direct Marketing Retail Dependability 2 57% 5-Year Dividend Return 0.00%
Sub-Industry Internet & Direct Marketing Retail Business Model 3 Today's 5+ Year Risk-Adjusted Expected Return 20.81%
Blue-Chip, Phoenix, Speculative, Hyper-Growth
Goal Scores Scale Interpretation
Valuation 4 Very Strong Buy baba's 54.11% discount to fair value earns it a 4-of-4 score for valuation timeliness
Preservation of Capital 7 Excellent baba's credit rating of A+ implies a 0.60% chance of bankruptcy risk and earns it a 7-of-7 score for Preservation of Capital
Return of Capital N/A N/A N/A
Return on Capital 10 Exceptional baba's 20.81% vs. the S&P's 3.40% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score
Total Score 21 Max score of 21 S&P's Score
Investment Score 100%


73/100 = C (Market Average)
Investment Letter Grade A+

(Source: DK Automated Investment Decision Tool)

For those comfortable owning such speculative hyper-growth blue chips, they don't come any more reasonable and prudent than Alibaba.

Even assuming a future PEG of 1.0, BABA offers 7X the risk-adjusted expected returns of the 29% overvalued S&P 500.

Risk Profile: Why Alibaba Isn't Right For Everyone

There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

Fundamental Risk Summary

China's e-commerce landscape has become increasingly competitive, with Pinduoduo registering faster GMV and user growth than Alibaba, and demonstrating its quality services amid COVID-19. Short video platforms and Tencent have also entered the e-commerce sector. The number of active buyers in the year ended December 2020 of Pinduoduo has already surpassed that of Alibaba.

The largest material ESG issue for Alibaba is its business ethics with regard to anti-competitive measures. It was fined CNY 18.2 billion ($2.7 billion) in April 2021 for forcing merchants to choose its platform exclusively and required to curb its anticompetitive behavior. Financial regulators in China have continuously scrutinized online financial services and has led to the cancellation of its investee Ant Financial's IPO. Alibaba has persistently faced the issue of counterfeit and infringing goods on its marketplaces. Hangzhou government’s assigning of representatives to work inside Alibaba also raise concerns of some investors, although there is no any evidence of consequence of value destruction for Alibaba.

Expansion into peripheral businesses might distract management, reduce profitability without materially improve Alibaba's ecosystem. While we're optimistic about Alibaba's ability to become a preferred partner for international retailers and consumer brands looking to sell in China, the firm does not enjoy the same network effect and brand recognition in other countries, and it may face challenges directly expanding in these markets.

Another ESG issue is corporate governance. In 2011, the company transferred the ownership of Alipay to a new company (now called Ant Financial, which is 33% owned by Alibaba) that is controlled by Ma, without the approval of key shareholders Yahoo and SoftBank." - Morningstar

BABA's Risk Profile Includes

  • regulatory/political risk
  • industry disruption risk (many large well-capitalized rivals)
  • talent retention risk
  • governance risk
  • VIE regulatory risk (see this article for a detailed explanation about this)

Regulators have already said that the VIE structure won't be eliminated.

In the low probability event that it was, then even HK investors could be stripped of their property rights.

In which case China's tech industry would permanently lose access to foreign capital markets. Which according to the Rhodium Group would cost its tech industry $46 trillion in growth capital by 2030 alone.

Beijing has deep pockets, including about $3 trillion in currency reserves. But if Beijing chooses the nuclear option on VIE, then China's chances of ever overtaking the US in tech dominance are likely nuked right along with it.

Material Financial ESG Risk Analysis: How Large Institutions Measure Total Risk

Here's a special report that outlines the most important aspects of understanding long-term ESG financial risks for your investments.

  • ESG is NOT "political or personal ethics based investing"
  • it's total long-term risk management analysis

BABA's Long-Term Risk Management Consensus

Rating Agency Industry Percentile

Rating Agency Classification

MSCI 32.0%

BB Below-Average

Morningstar/Sustainalytics 10.9%

28.2/100 Medium Risk

Reuters'/Refinitiv 34.9%

Satisfactory (Just Barely)

S&P 19.0% Very Poor
Consensus 24.2% Poor

(Sources: MSCI, Morningstar, Reuters'/Refinitiv, S&P)

(Source: FactSet Research Terminal)

China Tech Stocks Sorted By Long-Term Risk Management Consensus

Company Safety Score Quality Score

ESG/Long-Term Risk Management Consensus Industry Percentile

UP Fintech Holding 87% 73% NA
Tencent 90% 82% 64%
Baidu 76% 73% 49%
Alibaba 75% 67% 24%
Pinduoduo 54% 49% 22% 80% 69% 15%
Average 77% 69% 35%

If ESG is your primary concern, then only Tencent is worth considering.

(Source: Morningstar)

  • 11th percentile for its industry
  • 48th percentile among all globally rated companies (nearly, 14,000)

(Source: Reuters/Refinitiv)

How We Monitor BABA's Risk Profile

  • 59 analysts
  • 3 credit rating agencies
  • 7 total risk rating agencies
  • 67 experts who collectively know this business better than anyone other than management

Rest assured that if BABA's thesis weakens, strengthens, or shatters entirely, we'll know about it and so will our members.

There are no sacred cows at Dividend Kings, wherever the fundamentals lead we always follow. That's the essence of disciplined financial science, the math behind getting and staying rich on Wall Street.

Bottom Line: Alibaba Is Set To Soar And Too Cheap To Ignore

I can't tell you when BABA is going to bottom, or whether it already has.

Chinese regulators say to expect more regulatory announcements until the end of the year.

At some point, the market will stop reacting to every new regulatory announcement with March 2020 style terror and blind selling.

My best guess is that between now and the end of the year, when the flood of new regulations finally slows or stops entirely, BABA will bottom, and then begin its climb back to fair value.

I can't tell you how long that will take, or whether BABA's future market-determined multiples will be 25 or 32 or somewhere in between.

What I can tell you is this. Even if BABA's multiples never improve, and remain stuck at 15X forever (highly unlikely), in that case, investors buying today would "only" make 24.6% CAGR long-term returns if BABA grows as analysts expect.

Can I promise you that the single Wall Street BABA bear is wrong? That the 58/59 analysts saying to buy now are correct? There are no guarantees on Wall Street, which is why all stocks are "risk assets" and always will be.

But I can promise you this. Right now, the best available evidence and consensus expert opinion of over 60 analysts, and some of the world's best asset managers all agree, now is the time to buy China tech blue-chips like Alibaba.

Does that mean everyone and their mother should back up the truck on BABA? Heck NO! If owning BABA would cost you sleep at night worrying about whether President Xi is going to push the VIE nuclear button, then don't own it, or any Chinese tech stock.

But if you're looking for the best relatively low risk/high probability deep-value hyper-growth opportunity on Wall Street, then BABA is as good as it gets right now.

Sure there are more undervalued China tech names, but none have nearly 70 experts covering them and providing us with a near-daily update confirming the long-term investment thesis is intact.

How confident am I in my Alibaba thesis? I have 15 more limits set for BABA, in case of a flash crash that sends it plummeting on institutional forced selling.

Do I think that those limits will fill? Probably not. But wherever BABA finally bottoms, I want to be there because right now the best available facts and reasoning all say the same thing.

It's the best time in history to buy BABA for a diversified and prudently risk-managed portfolio if you're comfortable with its complex risk profile.

You're neither right nor wrong because other people agree with you.

You're right because your facts are right and your reasoning is right – that's the only thing that makes you right.

And if your facts and reasoning are right, you don't have to worry about anybody else.” - Warren Buffett


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This article was written by

Dividend Sensei profile picture
Maximize your income with the world’s highest-quality dividend investments

Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.

The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).

I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.

My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.

With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.

Disclosure: I/we have a beneficial long position in the shares of BABA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dividend Kings owns BABA in our portfolios.

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