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Alibaba Has Never Been That Cheap, But May Become Even Cheaper


  • Alibaba stock is now trading at about the same valuation level it was during the Chinese stock market crash in 2015.
  • The Chinese economy faces much bigger fundamental problems than it did during that crisis, so BABA still has room to correct further.
  • What if BABA's cheap multiples are just justified by weakening profitability and marginality levels?
  • Seeing all this and sensing the danger, institutional investors continue to close their positions at the expense of those who are "fooled" by the apparent cheapness of the stock.
  • I rate BABA as "Neutral", amending the previous "Bearish" rating in the hope that CCP's rhetoric towards Big Techs may change to stop capital outflows.

Latest Consumer Technology Products On Display At CES 2017

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Intro & Thesis

Over the past few days, we saw a widespread risk-off in Chinese stocks traded on U.S. exchanges - Alibaba Group (NYSE:BABA), (NIO), (JD), and (PDD) in particular stood out.

This article was written by

Danil Sereda profile picture
Daniel Sereda is chief investment analyst at a family office whose investments span continents and diverse asset classes. This requires him to navigate through a plethora of information on a daily basis. His expertise is in filtering this wealth of data to extract the most critical ideas. He runs the investing group Beyond the Wall Investing in which he provides access to the same information that institutional market participants prioritize in their analysis. Learn more.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (121)

Regarding the de-listing argument... according to the SEC the company once placed under "probation" would have to provide 3 years of proven non-compliance, before de-listing; so in theory we could be quite a long way away from this being imminent or happening.
Fridays volume spike combined with a blowoff price decline in percentage terms was action often associated with exhaustion and the end of a move. And maximum pessimism was present in forums and stories. Most news that was fresh had been widely disseminated and apparently fully discounted. We’ve seen the lows.
Looks like your skepticism may have marked the point today ( Monday, Dec 6)
of max pessimism ( I hope )
Danil Sereda profile picture
@LPeter Let it run for a while, we'll see in the coming weeks.
I don't like trying to call prices, to some of the commenters here, but regarding the recent selling; individual as well as institutional investors are locking in capital losses, Hedge funds, that got creamed this year are probably doing the same and clearing the books of any losers, window dressing is all important to clients and putting all that together, very few are buying and more are selling. Eventually buyers will step in - usually after the 7th of December (due to wash sale candidates) and people may start to accumulate at this level. A potentially interesting event to BABA is the recent announcement that they are planning to enter into the web services and cloud business, which could be an attractive catalyst to justify a higher multiple (maybe P/S might be more relevant than PE ratio?)
I don't know what price the stock will go to - high or low, but I am in a long position and also not terribly happy with the recent events. My mental fair value might be somewhere in the 160 range and I use options (write Call) to try to reduce cost basis. Should the 200 day cross to the upside in the future, I would change my options strategy accordingly.
So who sold yesterday ?
You are right. BABA could become even cheaper, but you could also miss the train. Investing is not try to guess next days/weeks movements.
Ivan Oreskovic profile picture
@João_PT nobody can time market, prica targets, enter points….bla bla bla bla….if itd good, Buy
This rumor is very well exploited fear, it was only amplified by the big investors in the USA ... they are already big and they know how non-genuine versions multiply to take advantage of it ... and many wonder if the information will be true in the future. ? .. In that case, China would change the rules of the game and since it manufactures 80% of everything .. in the world, the US market would collapse. but please don't keep repeating communist chinese like this sick trump taught you
thirdcamper profile picture
Agreed on BABA, in fact skeptical of all Chinese ADRs for reasons to do both with China and the US regulators.

Danil Sereda, I wonder what you think of SFTBY these days? To me it is looking like a way to have exposure to Asia and Asian tech in particular after the Chinese tech rout, with abundant FCF, very low valuation multiples (PE 3). I know all about their recent missteps and troubles, but I still think the stock looks vastly undervalued. And Japan is more secure for investing than China in terms of the immediate risk to the security.
ndardick profile picture
@thirdcamper Now is the time to avoid battleground stocks.
thirdcamper profile picture
@ndardick Don't know about that. No more battleground stock than INTC which I picked up for $49 recently and is now on fire.

Asia has had a tech rout. I think a lot of it now looks attractive. I bought ASX on Monday.
ndardick profile picture
@thirdcamper Congratulations on your success with INTC. I commend you for trying to buy valuable stocks at cheap prices. That has been my philosophical approach for years. While you are looking for new ideas, however, I am adding to my most comfortable investments in large cap pharma (VTRS, BMY and MRK), big banks (JPM and C), and defense contractors (RTX and LMT) on sell-offs.
Ivan Oreskovic profile picture
Just buy….do not time the market, it is imposible…..
Murad Shawar profile picture
@Ivan Oreskovic See you at 70$ keep buying
Ivan Oreskovic profile picture
@Murad Shawar who cares
Murad Shawar profile picture
@Ivan Oreskovic obviously the market which is going to send it to 70$
Bag holders praying
jorisderooij profile picture
Main reason institutional investors have been bailing is to safe face. They like their job, and their buddies are dropping baba too.
In a perfect world, delisting does not change the value of the company.
If it gets delisted, you still own the stock and can trade it OTC.
What changes, is the capital market for BABA.
Can‘t believe how cheap this is…
@lionas94 94 is probably stands for your age, so here is free wisdom for you: if the capital market changes (read as range of people/institutions who can invest into the company) it limits how high your valuations can grow, what impacts the share price what impacts your profits on the company (in BABA case - your losses for now). Not sure if anyone explained that to you, but people invest for profits, not for owning just for fun (and still BABA is not fun).
Either way I think you can connect 2 and 2 together.
P.s. my client owns 1235 shares of BABA with a loss of $86,000. I told him since $215 that BABA is a bad investment. He didn't listen and went by himself with that. I will benefit if it goes over his $186 either way, but so far I would rather have 200k extra in cash to purchase some better companies. So, I am kind of trying to say, that I am long on BABA as well.
Murad Shawar profile picture
@TheChamp911 don’t know what he means by doesn’t change value look at DIDI stock down 30-40% in two days same shit could happen to baba so glad I sold at 240$ lost 900$ learned lesson and made 6k putting that money in good American companies
@Murad Shawar he probably talks about some book value if Chinese accounting is correct.
Whos going to make all the iPhones and Tesla’s when the US goes into a protracted Cold War with China? What about all the SnP500 companies that do significant business in China? Are they all uninvestable? Have you guys sold out of SPY? SPY will prob drop 50% once the official Cold War starts. If an actual war breaks out, you better have your bunker ready. China has 450 nukes, so if 10% of them make it to US soil, we’re looking at 45 cities going poof. Don’t worry, we have 6k nukes so we’ll be able to obliterate all of China. Thank god. But SPY might drop 99.9999% if that happens. Just FYI.
Danil Sereda profile picture
@gstrfbull "Whos going to make all the iPhones and Tesla’s when the US goes into a protracted Cold War with China?"

This article is about Alibaba, man. The fact that there will be no one to make iPhones does not make BABA any more attractive.
@Danil Sereda Danil, thanks for your article.. I think his point is that, Ceteris paribus, Alibaba is a more attractive investment to those who believe that it is in the best interest of the U.S. and China to be competitors (and not enemies); than to those who believe that China is just another banana republic ... The is no question Alibaba has been an awful investment: due to the relationship between 1. U.S. and the China, 2. China and Alibaba Relationship, 3. Alibaba and Competitors ... The question to those who bought on Friday at 108, is what happens in the future? ... To the investor who admits her limitation, the pain of a 50% drop from 110 to 55 in the next 2 months would be an ok price to pay if one knew with certainty that Alibaba would be worth 220 in two years ... But if one has not faith in the future of U.S. China relationships or China Alibaba relationship, Alibaba is by no means a cheap stock
My issue is not Baba is a company, but the CCP bringing forcing Chinese companies to delist which destroys shareholder value. If I buy US ADRS i may end up with a bag. That‘s how the institutionales think about it. Everyone smart may end up waiting how it plays out - which could mean missing the bottom if CCP doesn’t touch Baba. You can‘t quantify political risk. So you might as well flip a coin on this one, even if I would personally want to have some exposure.
If one wants to improve then one must learn from those who have been consistently successful over decades. Ray Dalio is the most successful hedge fund manager and recently he launched his new book "PRINCIPLES FOR DEALING WITH THE CHANGING WORLD ORDER"

US geopolitics is for the politicians n is beyond investors control. It is very important for any individual to think for yourself rather than let politicians think for you n you end up pathetically parroting the views of the politicians

Perhaps US politicians ought to read Ray Dalio's new book as it offers a fresh new perspective for politicall leaders in USA to understand in an objective manner on the changing world order and hopefully manage the changing world order in the most optimal interest for USA, American investors n American citizens v

The most successful US hedge fund founder Ray Dalio has opined that "No Empire lasts Forever" and why certain countries succeed and others don't and he opined that China's balance sheet is much stronger than US balance sheet.

If you earn n spend less than what you earn, your balance sheet is good. If you Invest your spare cash in undervalued securities, your balance sheet improves more over time as price appreciates. However if you spend more than what you earn, then your balance sheet deteriorates and if your personal debt grows even bigger over time it will come a time when you cannot pay back your total liabilities and you unfortunately through your own action become another number of the financial destitutes

So do pay heed to Ray Dalio's advise as he is a very successful Heage fund manager for decades.

As an individual investor you will improve your financial wellbeing over time if you do take the time to focus n master Fundamental analysis, Technical analysis and Cycle Analysis

The worst action for anyone to do anywhere in this world is to parrot the politicians
im already 70% down on baba. thanks.
Longbow Archer profile picture
@karondongotbanned Tax loss and rotate to GOOGL?
Andrew Feazelle profile picture
@karondongotbanned omg that sucks. I'm at -43% but will hold for 20 years so likely I'll still win. I might add enough shares to bring my cost basis down to Morningstar fair value for the stock (which was recently revised down sharply). From a risk management POV I only invested like 0.5% of my portfolio in BABA, so not a big deal on my part. CFRA has been pretty good about its price outlooks for the stock so I might buy a few more shares using them as a guide.
Murad Shawar profile picture
@andrewfez No you really wont china is talking about Hong Kong Listing if that happens this crap is 50$ max and thats when Ill buy 1% of my portfolio in baba and if they say vie is illegal and shareholders get wiped out no big deal I would only lose 1%
PauloCostaSilva profile picture
One looks at $BABA fundamentals, moat ... then see what's happening ( I look at 50% of the market cap being wiped out in less than year and I'm speechless ) and cannot, I repeat, cannot, in good mental health spend a single dollar & go buy the stock.
I lost faith in all Chinese stocks.
ferrari2020 profile picture
@PauloCostaSilva I agree, this is the only stock I own for the past 3 years that's down over 50%, DCA hasn't helped much and I've made only small monthly purchases since it's fallen below $200.
No certainty in the CCP not imposing future fines, the Chinese economy also comes into question and third there is the possibility of being delisted or having to face further restrictions on it's stock and business practices.
It's cheap for several reasons and I will make very small investments in the stock going forward but I won't double down under these circumstances.
BABA is now my smallest holding.
I’m waiting for the guy who says, “I’ve already doubled down 3 times and am totally stoked to double down again here. The more they sell the happier I am”

@Moomoo22u2 That would actually explain me in all honestly. I am still buying the stock because I believe in the company and don't believe they will go to zero.
@Crazrwire999 why should they?
You are absolutely right, there is no reason for this stock to go to zero.
Murad Shawar profile picture
@lionas94 VIE buddy this is why the stock is dropping look at didi
The Ant restructuring will be interesting. 60% of profit was through credit and it looks like Ant will only own half of the new consumer finance business required by regulators. Not sure if historic biz ss well as new biz has to go thru that - anyone know?. Plus from the Ant ipo prospectus CNY4tn in wealth management which must have property developer exposure. Will Ant need a lot more capital? I am guessing Ant will be making quite a bit less than the CNY20bn (20% of earnings) current run rate (which includes some asset gains according to Q2 earnings release)
Forget it, Jake. It’s Chinatown.
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