Is Alibaba the Dragon Empire's Golden Goose?
The frenzied rally in China Big Tech that began in late September and led to a 46% rise in Alibaba ADR in New York ended in heartbreak even before the election of Donald Trump on Nov 6. Alibaba (BABA) has fallen from its recent peak of 117 on 7th October to 87 now. Twice bitten, thrice shy is the psychology that defines Wall Street's verdict on China and many US fund managers have even written off the Dragon Empire under President Xi Jinping as uninvestable.
The macro-optics in China are still predictably awful on the eve of Trump's punitive tariffs but bargain hunting in the world's cheapest e-commerce/cloud and AI franchise at rock bottom valuation levels may yet prove profitable. Hence my interest in Alibaba, now that it is in the depths of its autumnal Great Leap Backwards.
BABA's strategy update in mid-November has myriad silver linings. One, there is no doubt that revenue growth from its public cloud business is accelerating and AI related products are best in breed in the PRC. Two, Alibaba has boosted monetization metrics in its Taobao and TMall e-commerce platforms, China's monster mass market digital franchises. Three, while Mr. Market was disappointed by the fall in free cash flow, I think management did the right thing in boosting investments in cloud infrastructure, optimizing its datacenter networks for artificial intelligence, exactly mirroring the strategies of Silicon Valley's best and brightest Mag-7 megacaps. Four, Alibaba is the leading Public Cloud Platform operator in China in terms of both reach and client engagement. Five, I realize that China's fiscal stimulus is inadequate, the CCP is not exactly an apostle of free market capitalism and its New York ADR is a glorified SPV with no voting rights that exists in PRC's legal lala-land. Yet at 8.6X forward earnings, Alibaba is too cheap to ignore at a time when its cloud/AI peers in the US trade at nosebleed valuations.
Alibaba ADR traded as high as $315 a share 4-years ago before President Xi torpedoed the Ant Financial IPO and slapped a colossal fine on BABA for antitrust violations even as the pandemic lockdowns, shadow banking crisis and property bust devastated the Chinese/Hong Kong stock markets. China cannot compete in the AI race with Uncle Sam without a national champion with the scale and IP resources of Alibaba. Beijing learnt the hard way that it is just not a great idea for even a Marxist-Leninist-Maoist state to kill its top e-commerce cloud golden goose while it is laying triple digit growth AI golden eggs.
I concede that my knowledge of Chinese politics, calligraphy and economics is less than encyclopedic but I can sniff out a fallen angel with a dirt-cheap valuation in the detritus of a vicious bear market as Deng Xiaoping once observed in Beijing's Great Hall of the People, "it does not matter if a cat is black or white as long as it catches mice". So, I morph into Matti-san the mouse hunter in Alibaba.