Best Ideas Newsletter portfolio holding, Chinese e-commerce giant Alibaba (BABA), reported solid fiscal second-quarter results for the period ending September 30. The report was welcome news after effectively a bear raid on the company’s shares from a widely-read publisher, the note of which effectively marking the company’s trading bottom. We continue to believe shares of Alibaba are a bargain even after the spike. Please be sure to access the company’s 16-page report for its cash-flow derived fair value estimate and fair value estimate range.
Management added upbeat commentary in the press release, noting “strong growth across the board and particular outperformance in mobile.” Gross merchandize volume (GMV) in the company’s China retail marketplaces grew to $112 billion in the period, an increase of 28% on a year-over-year basis. Revenue growth was even better at 32% on a year-over-year basis in the quarter, and mobile GMV accounted for 62% of total GMV. Management noted that they are “winning in mobile,” but we also liked Alibaba’s non-GAAP free cash flow generation in the period, which totaled $2.1 billion. Revenue from cloud computing and its Internet infrastructure business accelerated in the period thanks in part to the opening of a data center in Singapore.
We heard everything we wanted to hear. Annual active buyers are growing nicely (+26%), mobile MAUs are advancing at a solid clip (+59%), and “user engagement is healthy.” Alibaba is focused on improving its same-day grocery delivery service in the largest cities in China, and it continues to develop commerce in lower-tier cities and rural areas of the country, noting that, during the quarter, it increased its “presence in over 4,000 additional rural villages.” The Chinese e-commerce giant continues to improve its monetization efforts. Alibaba’s blended monetization rate advanced to 2.42% in the most recently-reported quarter from 2.3% in the same quarter a year-ago. Given the size of the company’s GMV, small changes in the monetization rate can have profound implications on profitability. We like the trajectory of improvement and believe there’s still more room for expansion in this key metric.
Our thesis on Alibaba has been twofold.
First, we believe shares are cheap on the basis of a discounted cash-flow model, and as in some cases, valuation can act as its own catalyst, which in part is what we are witnessing. The company is growing its top line and generating strong levels of free cash flow, a combination that adds conviction to our cash-flow-derived valuation assessment of shares. Typically, “value traps” occur with companies that have declining revenue and/or earnings, or earnings that are being propped up by lower-quality initiatives such as cost-cutting or share buybacks. This is not the case with Alibaba.
Second, we’re taking the long-term view with the holding in Alibaba in the Best Ideas Newsletter portfolio. Though near-term economic concerns remain, China offers a tremendous long-term growth opportunity, and we expect Alibaba to remain at the forefront of e-commerce proliferation in the country. What excites us the most, however, is that Alibaba may look far different 10 years from now than it does even today, as it expands into ancillary endeavors around the world. We remain bullish on shares and view the company as core to the international exposure in the Best Ideas Newsletter portfolio.
Shares of Alibaba are now 40% higher than their 52-week lows and more than 30% higher from our September 14 counterpiece, The Puzzling Attack on Alibaba, republished below:”
A large publisher ran a negative article on Alibaba last weekend, “Alibaba: Why It Could Fall 50% Further (1)” As the article has successfully struck fear into the hearts of US investors in light of ongoing Chinese market collapse, it has also successfully hurt Alibaba’s stock. There are a few things that we think are worth emphasizing that were lacking in the piece.
Related tickers: BIDU, TCEHY, FXI