Fundamentally, Alibaba is a rapidly growing conglomerate which is hugely undervalued. Here's why:
No Material Trade War Concerns
Alibaba's co-founder and Executive Vice Chairman Joseph Tsai came out swinging on the earnings call last week. He wanted investors and analysts to fully grasp that while he expected trade negotiations to resolve themselves soon, Alibaba's opportunity was bigger than many might realize. Namely, that China's commitment to becoming a consumption-led economy means that it will, over the next several years, become a net importing country.
This is a key tailwind to its platform which is at times even misunderstood by its shareholders. As China continues its development from an export economy, consumers will look towards the reliability and efficacy of Alibaba's platform to consume products and services.
Long-Term Growth Opportunity
When thinking of Alibaba, is it important to consider that the platform has more than 650 million annual active consumers. Why does this matter? First, because it goes to show that while Alibaba might be little more than a familiar name in the U.S., it is absolutely huge in scale.
But what's arguably even more important is that Alibaba's platform is still far from reaching full penetration even in China. Case in point -- over the past year Alibaba, added more than 100 million annual active consumers, with over 70% coming from less developed cities in China.
Alibaba admits that new consumers to the platform, particularly those from less developed low-tier areas, start off spending less on the platform than more established consumers. And how at first, new customers start off by engaging in Alibaba's social media platforms, then progress to very basic internet searching before trying out shopping and spending cash online. But in time, new customers continue spending more as they start to trust the platform.
This once again emphasizes that Alibaba's long-term growth prospects remain solid.
How Does the Competition Match Up?
In the U.S., Amazon (AMZN - Get Report) continues to make headlines for its constant market share growth and continuous disruption incumbents. But let's focus down on Amazon and Alibaba's contrasting business models.
Amazon's growth is so capital-intensive that despite being valued as one of the most expensive companies on the planet, its free cash flow generation remains unimpressive. On the other side of the planet, however, investors can buy an asset-light and free cash flow generating e-commerce competitor.
In fact, Alibaba is so free cash flow generative that despite high levels of investments, it still carries a net cash position of RMB58.9 billion ($8.5 billion).
Moreover, in a huge win for shareholders, Alibaba opted to implement a share repurchase program. Starting in September 2018, it chipped away at a $6 billion share repurchase program and deployed $1.6 billion by the end of March 2019 at an average cost of $144.04 per share. This directly enhances the value of Alibaba's long-term shareholders, given that at the time of writing, Alibaba's share price is approximately $164 per share.
Valuation - Huge Margin Of Safety
The above table needs some interpretation. On the face of it, it appears that Alibaba's revenues are the most highly valued amongst its peer group. But this is not the case. In fact, the reason why its revenues are so highly praised is that Alibaba's business model is so asset light since its ecosystem operates largely infrastructure-free, with its operations mostly focused on taking fees from sellers.
Next, excluding acquisitions, Alibaba's revenues grew by 39% year-over-year. This pace of growth not only is the strongest amongst its global technology peers, but reinforces the idea that paying 20x its cash flows from operations means that investors are in no way overpaying for Alibaba.
The Bottom Line
Given Alibaba's long-term tailwinds and the fact that investors misunderstand and fret over the potential implications of the trade war, Alibaba's share price has languished somewhat. But in actuality, we now have a terrific buying opportunity for patient investors seeking diversification by investing in a fast-growing, free cash flow generating commerce enterprise that is very cheaply valued.