eThe stock market can be frantic and disorderly. You will hear of stocks being called value or growth. Today we’re going to look at how Alibaba the Chinese e-commerce giant is a value stock based on the criteria Benjamin Graham taught in the early 20th Century.
Alibaba the growing behemoth of China, and one of Amazon’s biggest competitors is a company a value investor keeps on their watchlist or better yet in their portfolios. Why is it a value investment? It’s a value investment because it meets and exceeds the criterion set for value investing in Benjamin Graham’s book The Intelligent Investor. The basic tenets of value investing are Determining a security/stock’s intrinsic value, having a margin of safety, recognizing market inefficiencies, and doing due diligence. Now we will use fundamental analysis to prove that if Benjamin Graham was alive today, he would call $BABA a value stock.
As of 9/8/2021, Alibaba was trading between the range of $169.97- $174.37 with a P/E of 20.47. As a value investor, you mustn’t be distracted or preoccupied with short-term market movements or price actions. You must be disciplined and focused on determining a stock’s intrinsic value, or what is its fair price. Warren Buffet is known to have said, “cost is what you pay. Value is what you get.” It is to our benefit as investors to buy low and sell high. The value of a holding must exceed its cost to be a great long-term investment. To determine intrinsic value many professional or sophisticated investors perform analyses like the DCF model based on assumptions of a company’s revenue, earnings, free cash flow, growth prospects, discount rate, and make projections in financial models based on historical data. The stock has been -35.13% off its highs due to bad news. Despite recent regulatory and governmental issues, this shouldn’t dissuade investors from researching and studying the company’s prospects. From 2019 to 2021 Annual EPS has grown over 66% and revenue has grown at around 40% in the last 12 months. Just based on this it can be perceived that a lot of growth has not been priced in yet in the stock.
Margin of Safety
Now that analysis was done you could base on your estimation of a fair value, determine the margin of safety. The larger the margin the better. If you analyze a stock that currently is trading at $45 and its intrinsic value is $47 you have a low margin of safety but if it’s worth $90 that is an excellent margin of safety with the potential to have a 100% ROI. Many value investors love to find deals with a high margin of safety, as it lowers their risk of losing principal and increases the profitability probability of investment. When markets become frothy or “expensive” it becomes harder to find these opportunities and leads too many to wait for “corrections” or other bear events or periods to begin acquiring positions. Right now, I believe Alibaba has a large margin of safety.
Recognizing Market Inefficiencies
There are many schools of thought on this subject in academia and the business world. The Efficient Market Hypothesis vs Inefficient. However, in my opinion, and believe it is that short-term markets are inefficient. Some companies at any given time may be overvalued or undervalued, but eventually, a company will be priced fairly (reversion of the mean) in the long term. It is important for value investors to not be emotionally attached or swayed by market sentiment today for investment for tomorrow. Right now, the market is nervous about Chinese tech stocks as regulatory news is spooking investors away from these companies. Also, on Seeking Alpha writer Oleh Kombaiev said, “On August 11, the Chinese government unveiled a five-year plan for tighter regulation of the country’s economy. According to this plan, new rules will soon appear, covering areas such as technology, national security, and monopolies. These new rules will affect China’s digital economy, including internet finance, artificial intelligence, big data, and cloud computing. Here is a link to the original text of the document.” However, the adage from Buffet should be ringing in your ears if you have a firm conviction in the future of the global economy and the growth available in China and Alibaba. “Be fearful when others are greedy and be greedy when others are fearful.”
Do your research, don’t take my word for it. Everything about forecasting and making predictions is prone to human error. My assumptions may be right or wrong. I might have a bullish bias, that is why you should do your own research and figure out for yourself why or why not Alibaba or other stock is or isn’t a good buy. This included reading earnings reports, SEC filings like the 10-K, researching industry reports, and just overall screening of the company’s management, and guidance. Based on my assumptions, my bullish thesis, and analysis I believe $BABA’s fair price is $620.10. From today’s price that’s a nearly 4x ROI if Alibaba continues to grow earnings by at least 25% a year.
Always Invest prudently, know what you own and why you own it.