Alibaba Group Holding
is probably “the cheapest company in the world” outside of Russia as investors put a high China risk premium on the e-commerce giant, according to Daniel O’Keefe, a managing director and portfolio manager at Artisan Partners.
Speaking at a roundtable group discussion Tuesday with other value-oriented portfolio managers, O’Keefe said that Alibaba (ticker: BABA) is “one of the cheapest stocks I’ve ever seen, especially for a business of that quality with that financial strength.”
The discussion, called Invaluable Insights, was sponsored by Ariel Investments and included John Rogers of Ariel, Bill Miller of Miller Value Partners, David Herro of Oakmark Funds, and Barron’s Roundtable member Mario Gabelli.
Alibaba shares are down 56% in the past year, and were under $101 early Friday. They trade for a third of their 2020 high. Their value began tumbling after the Chinese government cracked down on a company they viewed as too dominant. Alibaba’s current market value is under $300 billion, against about $1.5 trillion for its U.S. counterpart,
Said O’Keefe: “Alibaba trades for a single-digit multiple of free cash flow and three or four times EBIT [earnings before interest and taxes]. So, you know, it’s the largest e-commerce company in the world that is levered to digitization and the expansion of the increasing wealth of the consumer and middle class in China.”
The stock trades for about 12 times projected earnings per share in its March 2023 fiscal year. J.P. Morgan analyst Alex Yao, who is bullish on the stock, wrote recently that net cash and equity investments at Alibaba total about $44 per share, or more than 40% of its stock price. By Yao’s math, investors effectively get Alibaba’s e-commerce business for free when factoring in the cash and investments and its cloud-computing operations.
O’Keefe said: “Everyone just goes, ‘Oh my God, regulation, the Chinese government.’ But you look at the facts, what have they done? Well, they’ve intervened on merchant exclusivity, so they’ve made platforms more competitive. They’ve intervened on payments exclusivity, so they’ve made payments systems more competitive. And they’ve intervened on network exclusivity to make networks more interoperable and more competitive.”
“None of those things are irrational and none of them are outside the bounds of what any developed world regulator would like to do, but cannot because they have to do it through the legislative process, which takes a longer time and it’s harder. So we don’t view what has been done as irrational, albeit it’s happened within the context of a command economy where they can do whatever they want,” he said.
Noting that the Chinese government has pushed the company to make certain investments, O’Keefe said: “And if those investments were excluded, you know, the EV [enterprise value] multiple would go down by another 40%, because they’re consuming 25, 30% of their profits on some of these investment areas. Which they just recently said, and this is significant, they’re going to start to taper. So, you know, it’s an extraordinarily cheap security, I think more than discounting the fact that it’s in China.”
Write to Andrew Bary at firstname.lastname@example.org