Welcome back. Everyone to the Joseph Carlson show on today's episode. We're going to be talking about Ali. Baba, everyone's favorite Chinese stock. Now I'm one of the ones that I'm invested in Ali Baba. I'm actually a content creator that when I talk about stocks ones that I want to invest in, I put my money where my mouth is and I invested 11,000 dollars in Ali, Baba at an average Shear price of $175. Now currently Ali, Baba trades at 86 So as of right now, I'm
down 50% on this investment. Now, I'm not the only one, there's many people invested in Ali Baba, I hear the chatter, I hear the buzz, I keep track of what people are invested in, and there's a lot of people invested in this company because initially, the investment thesis for Ali, Baba was very convincing. We had people like, like Charlie Munger a legendary investor that piled money into Ali. Baba, at a much higher, share price. I bought in at a lower price than Charlie, Munger and he was
Missive of any of the concerns. You said that people were wrong on China and that ultimately he'll be proven, right? We also had people like mohnish, pabrai pile money into this investment. A concentrated portfolio into it. He swapped out later on for Ten Cent, but the point remains he remains bullish on Ali.
Baba. So you have these value investors that are very influential piling money into this company and it caused a lot of people in the community to look further at this company and see if there's any value there. Now, I did that. I looked at Ali Baba, I looked at the investment thesis and I found it be a fundamentally strong company, that was growing quickly. And the metrics show that it was undervalued.
There is also some ancillary concerns, there's things going on with China, but my thought was that those were probably overblown. So I did follow and allocate a portion of my portfolio into this investment and that's
obviously so far been a mistake. So, I think it's time that we do one update on Ali. Baba, I think the time is long overdue, and what I plan on doing is Breaking this down into two different categories, the non fundamentals, these are things that aren't directly related to the company, but they're things that are relevant, they affect the company and then we have the fundamentals of Ali.
Baba. I'll be giving a full overview of that as well, and I think that this will paint a very full picture of how this investment stands right now. So let's go ahead and Jump Right In. Now the first thing that I'll mention that's quite obvious is Ali. Baba is in a significant downtrend. If we look at the dip finder, which is a tool All available to patrons at tracks movement of
companies, it shows that Ali Baba is down. 45% below its 200-day, simple moving average, which means that the company is in a significant dip. It's been treating downwards and it's right there next to companies, like Spotify, which is also in a significant dip. And it's Facebook, which again is also in a significant dip, it's around 50 percent down from Saul time highs. So Ali, Baba isn't the only
company. Of course, being sold off right now, but it is a very significant Off and being down, 45% below your 200, a moving average. That means there is an incredible amount of negative momentum in this company. That's also Illustrated through the stock price. Check this out, this is Ali Baba, stock price all time, it's down seven point six five
percent from IPO. So, I peeled back in, let's see, September 19th of 2014, and if you would have purchased Ali Baba at IPO, you would currently be in the red. If you just held the entire I'm the only time that you could really be in the green is if you bought in the 60s and 70s and 2016 and late 2015. So that's the only time currently it's at eighty, six dollars a share. It's just incredibly devastating almost.
Every investor I have to assume is in the red in this company probably 95% Plus or in the red and the majority of them that purchased it, like 2018 and Beyond are deep in the red 40, 50 percent plus. So if you're in the red and Ali Baba, In Good Company. There's a lot of other people in
the same situation. So investors are fleeing Ali, Baba. Another thing that we can look at to illustrate, this is the price to sales multiple that this company trades that when an IP owed right here, you probably can't see it, but it says, 19 and 20 price to sales the next 12 months. Price to sales was a 19 or 20, that means, Ali Baba was trading at a price multiplied by 20 times. Their next 12 months sales, so
pretty high. T'pel to put that in context, Amazon trades a day 3.1 price to sales. So investors are paying three point one times their next 12 months sales. So Ali Baba was trading at a 20 that's came all the way down over the past couple of years to a 1.6 from a 22, a 1.6. Now normally you expect contraction in this multiple over time as the company matures it was never going to maintain a 20 price to sales but to see it contract this Massively is what the surprise is.
You think it would come down from a 22 maybe like a seven or an eight right now you know not a 1.6. That's a lower price to sales and Amazon around half. So investors are selling out of this company and multiples are Contracting. Now, let's go ahead and figure out why. What's going on with this company? Let's try to get an accurate view of what the current state of Ali. Baba is let's start off with a non fundamental things going on right now, we have a risk of the list.
Ting. This is probably the most recent event that I think has spurred a lot of selling right here from the SEC. We have the holding foreign companies accountable act, since Chinese companies are foreign companies being listed on us exchanges and available on us exchanges, the SEC is trying to say, hey Chinese companies.
You have to be able to give us all the documents and access to all your accounting that us companies do so that us investors are protected, so they know what they're buying, they know what they're being invested in and a lot of Chinese companies. We'll try to avoid this, they won't give the same amount of documents, you know, this is kind of a back and forth between China and the US is the Privacy issue and getting access to these documents.
Well, this was renewed when they came out and listed five companies that they actually plan on delisting. They said the ACT requires foreign companies to make documents available for accounting purposes and delist them if they can't meet the requirements. That's the basics of it. The preliminary list of five companies that the A sec listed out, includes be Xin, Zhao, lab, hutchman, and young, China, and a CM. So these five companies which are not Ali.
Baba are the ones that are initially outlined as going to be the listed if they can't come up with this information. Now, just because these companies were listed, doesn't mean that it only affects these companies, a lot of investors took this as a signal, that Ali, Baba and JD, and all the other Chinese companies are next. So, even though these ones are directly, Stood, disaffected, every Chinese company listed on a u.s. stock and especially the big ones, like Ali Baba.
So this is one of the most recent reasons right now, why Ali, Baba's being liquidated being sold off the risk of delisting, a lot of investors just don't want to deal with this. And it seems it seems as though the risk of delisting is actually increasing over time, it's not being minimized or going away. The initial thesis I had on Ali. Baba is yes, there's a risk of delisting but that's probably going to subside. It will Abate over Time investors will forget about
that. You know the relationship with China will go on. We have so many companies doing business with them like Nike and Disney and, you know, apple and so much connection with them already that I thought that this tension between listings was a little bit overblown. Well, looks like that may actually be incorrect. A lot of investors are becoming increasingly concerned about the
risk of delisting. Now one thing to note on this subject is there are still analyst saying that there is a risk of delisting, but it's still being overblown by Market
to markets overreacting. We have Citigroup analyst Alicia saying the market is overreacting, quote, we maintain our view that the SEC update is not new news, and any real risk of adrc listing will likely materialized by 2024 to 2025, when companies failed to disclose the requirements mandated by the SEC for three consecutive years. So Alicia at Citigroup still believes that this this is an over reaction. She believes the market is overreacting And the real risk of a DRS, delisting Still
Remains very unlikely. So we have the risk of delisting and whether or not the markets overreacting or under-reacting, either way, a perceived risk still affects the stock price. So this is certainly affecting the stock price in a negative way. Now, the next thing that I look at is China's economy is undoubtedly, sawing every single piece of data, I look at is that China's economy is it's slowing
down, it's not growing as fast. Now, there's different things that we can look at, but here's Here's what's going on right now. Construction and property sales have slumped small businesses have shut because of rising costs and week. Sales debt-laden, local governments are cutting. The pay of civil servants.
Chinese Chinese economy, slowed markedly in the final months of last year as a government measures to limit, real estate speculation, hurt other sectors as well lockdowns and travel restrictions to contain the coronavirus. Also dented consumer spending stringent regulations on everything from internet businesses to after-school tutoring. These also have set off waves of
layoffs. There is a compounding effect of a weak economy hair and I could go on and on about this subject bond yields are completely slumping. Real estate deals aren't happening in China. Consumers, don't have as deep pockets as they do in the US and this does affect Ali. Baba, keep in mind, that Ali Baba is a consumer company, they're heavy in the Chinese
market. So if the Chinese market is slowing and people are starting to fill poor there, they're not going to be spending as much money which will Effect Ali, Baba sales. So even though this isn't directly a fundamental of Ali, Baba itself is directly relevant this influences Ali, Baba's growth. This is the market, they're operating in and then the last thing that we can look at is global, tensions are rising now. Of course, we have Russia invading Ukraine.
This is shifted Dynamics and the global world, right? The global World Order. Russia has become like more of a pariah than they've ever been. The entire modern world has basically said, Ed, we're not doing business with you, we don't approve of what you're doing and where economically
attacking you. So that's caused an interesting dynamic because China is one of the only rare sort of allies with Russia. I wouldn't say that they're teamed up like the, you know, like the UK in the u.s. right there. Not that type of Ale, they're not like Cannon, the us but they are kind of Frenemies. They like each other because they share in the same type of economic enemies and even though I don't think China totally trust Russia or vice versa. Are on that, that side of
things. And I think that this creates also an interesting Dynamic with China. I think the events with Russia and Ukraine, and the relationship with China and the rest of the world has obviously caused more tensions between China, and the US. So even though China hasn't done anything too dramatic, they haven't made any big moves, like invading Taiwan or doing anything like that. Just the relationship with Russia and being friendly with them.
I think has caused more tension with China and the rest of the world. So, This is another compounding - relationship and negative effect with the rest of these non-fundamental stuff. This has nothing to do with the fundamentals of Ali Baba. But all of this is affecting the stock price of Ali Baba. So it's important to factor in. All of these have a compounding effect.
The risk of delisting Chinese economy is slowing right now and Global tensions Rising. It's just different things that get investors uneasy about this stock and lead to selling so now that we've set the stage and looked at some of the non-fundamental, Affecting the stock price of Ali. Baba. Let's go ahead and look at some of the fundamental developments of this company over the past five years. First of all, we can start off with the growth. The growth is slowing and not
only is it slowing? The growth is just slow it subjectively slow, and this is a change in the thesis of Ali Baba. If you went back a couple years, Ali Baba was an investment in the fast-growing Chinese e-commerce, Giant and fin tech company in the fast-growing Chinese economy. Reading was fast-growing.
Now we compare this recent quarter to the history of Ali, Baba and Ali Baba historically grew at rates up 30% plus look at it over the past couple of years, it was consistently growing at 30% 20%, sometimes they even got as high as to 70% Revenue growth in 1/4. This was a fast growing company and now it's slow down to rates of 10 percent. That's a disappointment. And one thing that you'll find is any time a company has rapidly decelerate and growth.
Typically Stock price goes down. If there is a rapid deceleration and growth the stock price goes down and the growth rate of Ali Baba has decelerate and rapidly. Now, the next thing that we can add to the list of fundamental developments is Ali Baba is losing market share and they're losing it faster than investors expected investors. Kind of look to Ali Baba initially as big Tech in China and as we know in big Tech in the u.s., they don't really lose market, share that quickly.
Like Amazon has kept their market, share apples, kept their market share R, Google's kept their market share Ali. Baba, is losing their market share and they cite Fierce competition. Competitors in China are evolving aggressively causing Ali, Baba to lose market, share as consumers shift from targeted, product searches to browsing an interaction Ali. Baba's shares of China, retail e-commerce Market has fallen to a projected 51% from 78% in 2015. Now in my opinion you should
expect market share to be lost. It's not like one company's going to keep 78%. Ever, but I think the rate at which they're losing market, share is faster than investors expected. So as they're, they're also losing market share on top of Revenue growth. Slowing stock price is going down. Now, the next fundamental development we can look at is
that the margins are shrinking. Simply put if we look at the operating margins or any of the margins of the company, they're shrinking and they're shrinking, pretty consistently. And this again, is somewhat surprising to investors. They had Ali Baba, as a very consistently, high margin company and the margins are now steadily, Going down. So you look at this and you compare it to other companies and you think what's going on with the company? It has Revenue growth is slowing.
Its losing market share rapidly in the margins of the company are shrinking. These are not good. Fundamental developments. Now, the next thing that we can look at is we have an additional issue, which is Ali, Baba's, operating spend the amount of money that they spend on sales and marketing, and general administrative cost that's going
up, pretty rapidly. You can look at the chart here quarter-over-quarter, every single quarter Ali, A spending more and more on their sales and marketing, and general, administrative costs. And it's going up at an accelerated Pace, but the revenue growth, and the other
metrics aren't following this. Typically, if a company spends more and more on sales and marketing, their revenue growth is following their growing very rapidly but you're seeing a deceleration and revenue growth and you're seeing an increase an acceleration in their spend. So that's another thing that's not really good with the development of this company.
Now, the last fundamental development that I think is important to highlight, is that At the earnings of the company, the earnings of the company, which everybody sites is the reason that they're investing in the company, they cite the PE Ratio. They say it's trading at a 12 PE, look how cheap it is. Ali Baba is a 12 PE and there's companies in the US that are trading at 25 and 35 PE. So Ali, Baba is cheap by contrast.
Well, the P/E ratios based on the earnings per share and the earnings per share growth of Ali. Baba has been very slow last quarter, it was - which it was expected to be negative, but it's still not. Had to have a - EPs and if we even look at the recent history, the earnings per share growth of the company. If there is any has been very unimpressive Ali, Baba's not growing their earnings as much as I would expect and as much as
other investors would expect. In fact if we look at the future analyst, expectations of their earnings growth from 2022 to 2023, it's only 10 percent, 10 percent, earnings growth, 10 percent earnings growth is very slow earnings growth for accompanying the stage of Ali Baba. So, if you're one of the investors just Inking on the earnings going up rapidly. That story might not play out as well. The future expected earnings, growth is very moderate in my opinion, slow for this company.
Now, looking at this overall, does this give you a better picture of what's going on with the company? And the reason, the share price is going down. It has slowing Revenue growth, in fact rapidly to celebrating its losing market. Share the margins are shrinking on the company. The operating spent is increasing, and the earnings growth leaves. A lot to be desired. Compare this against any US tech. Compared against Apple, Apple has very consistent margins. They're not shrinking Apple.
Apple's operating spend matches their business growth. It's not growing faster than their revenue apples. Apples Revenue, growth is not rapidly to celebrating, it's very consistent, right? The continue to have pretty standard Revenue growth, Apple's earnings growth remains very solid faster than Ali Baba's and you could do the same exercise with any other tech company or any company in general, if any company has these type of fundamental development Hence
stock price is going to go down. Ali, Baba is no exception, it has poor fundamental developments and the stock price is going down as a consequence now, add onto that list, the non-fundamental developments that are unique to China. And I think this is where you get the massive sell-off. So these very poor fundamental developments in combination of these non-fundamental extra risks in China.
I think make for this unique cocktail of the Steep sell-off, so so far you're saying Joseph. This is a depressing video as Shareholder of Ali. Baba. And I know it might come off that way. I don't want to be just a depressing video. I'm trying to give the truth here and accurate representation of what's going on. I'm not trying to just get out the pom-poms and chair on Ali. Baba and say that the market is
stupid, right? It's not always the case that the market is dumb, there's a lot of issues that Ali Baba's facing. The question is, what do we do in this situation? What do we do now? Well, I can tell you at least what I plan on doing personally, I believe strongly that the fundamental issues with Ali Baba. You are largely a direct result of the issues in the Chinese economy and I think that the Chinese economy and the issues it's facing right now, are
largely temporary. I think that they will eventually get over covid and there's zero tolerance policy. I think that travel will resume and I think that the real estate issues are facing as well, will eventually be resolved. So, my thesis remains that the Chinese economy will eventually recover and if that happens, if Chinese economy goes back into growth mode, I think a Of these fundamentals will continue to tick up words, they'll actually re-accelerate.
So this is just a game of probabilities and I think that's the way that you look at it. If you think there's a decent chance that the Chinese economy will re accelerate and get over the slump. It's in. Then Ali, Baba might be a good investment. It's at a very low price, it has many risks already priced into it and if any good news, happens re acceleration, there's
probably upside to the company. If you think that there's a high chance that the Chinese economy will never be As fast as it was, it will never grow to the same extent. It was and it will be in a slump for like, the next decade. Then Ali Baba is probably not the company to own. It has an enormous amount of exposure to the Chinese economy. So that's the way that I look at it.
I think there's still a lot of upside with the company right now, especially how much the price has come down, but I also know there's a lot of risk in this holding so I am not going to be piling more and more money into Ali. Baba, I want to control the amount of exposure, I have to it and even though I'm holding my shares and I There is upside, I realize there's still a lot of risk left with it, so that's my
thoughts overall. And I hope you enjoyed this overview of Ali. Baba, if you like this type of content, check out the patreon. There's a link in the description below. It comes with a free trial, so you're not risking anything you get access to a disc or Community with 2,300 members. Now it's growing rapidly. We have hours and hours of free content, tons of discussion and you get access to Quality trim, which is a suite of software that has things like Quantum insights.
That shows you all the fundamentals of a company. You have the dip finder which shows you which companies are in a dip in a price surge, lots of fun stuff. So if you're interested in that, there's a link in the description below other than that, I'll see you in the next one.