Alibaba: Are Bill Miller And Ray Dalio Wrong? BABA Down From Delisting Fears

Alibaba: Are Bill Miller And Ray Dalio Wrong? BABA Down From Delisting Fears

Why are Bill Miller and Ray Dalio invested in Alibaba? BABA’s stock price fell to a 5 year low as reported losses and 5 Chinese companies got named to an SEC list. Lets consider what these superinvestors have to say.

Things got worse for Alibaba and Chinese stocks in the week ending March 11, 2022. What seems to be happening to Chinese stocks reminds me of a Paul Newman quote: “It’s always darkest before it turns absolutely pitch black.”

What happened to cause Alibaba to drop below $100 per share was that its ecommerce rival reported Q4 2021 losses and weak revenue growth (similar to what Alibaba is experiencing with slowing consumer demand).

In addition, 5 Chinese companies were added to an SEC provisional list for failing to provide access to audited financial documents that the SEC’s Public Company Accounting Oversight Board must verify in order for the Chinese ADRs to continue to be listed on American exchanges. These companies added to the SEC list include: Yum China Holdings, ACM Research, BeiGene, Zai Lab, and Hutchmed.

Even though these 5 companies are not nearly as big as Tencent and Alibaba, they still had a huge impact in bringing down Chinese stock prices last week. And while investor sentiment is sour on a lot of Chinese stocks, there are reasons why certain stocks have plummeted more than others. Like how DiDi stock has been left for dead.

But you have to consider how rational is it for the stock prices of the largest Chinese companies like Alibaba and Tencent to be affected by the actions of the 5 companies in the SEC hot seat, which have significantly smaller market caps than the biggest and most respected Chinese companies.

And these companies could easily make up their current reporting shortfalls by providing the necessary access to audited financials, as long as they remain compliant with two conflicting sides: the US and Chinese regulatory bodies. And the SEC would only potentially delist if companies don’t comply within 2-3 years, so these companies have plenty of time to provide the financial proof.

The risk of delisting Chinese VIE ADRs has always been there, and they could easily be delisted if they don’t comply. But this doesn’t seem likely that this is a real risk for Alibaba at this time. But who knows!

And should we believe well-respected value investor Bill Miller who recently said that Alibaba was the “cheapest big cap stock in the world”?

Known for some extreme losses and gains, Bill Miller had run Legg Mason Capital Management for decades and beaten the S&P 500 for 15 years in a row until 2008 caused his funds to lose two thirds of their value.

Now Bill Miller runs Miller Value Partners with $2.8 billion AUM, and he seems extremely bullish on BABA as it is his 15th out of 94 positions with at least $80 million invested in it.

Lets hear his investment thesis on Alibaba as he explained to Consuelo Mack of Wealthtrack and you decide if his investment case makes sense or not.

The main gist of what Bill Miller said was that the political risk and financial punishment has been baked into Alibaba’s stock price. This would seem logical if the financial pain of the $2.8 billion antitrust fine and $15.5 billion common prosperity fund over 4 years levied on Alibaba are the last regulatory drags on BABA’s financial performance going forward.

Miller would be surprised if Alibaba couldn’t grow by at least 15% per year, even though this is down from their prior 25-30% growth rates. Their future doesn’t seem too shabby if they can continue to sell to billions of customers and grow the Alibaba Cloud.

And should we believe billionaire hedge fund investor Ray Dalio who runs Bridgewater Associates with $223 billion AUM? I have heard that Dalio’s latest book “The Changing World Order” examines world power and currency reserve changes throughout history. Dalio seems to be extremely bullish on the future of the Chinese economy.

Ray Dalio said that “almost everybody’s underweighted China,” as he argues that not enough capital is invested in China yet. So he believes people should get investment exposure to China through a diversified portfolio to have a balance of assets in China.

My take on Dalio’s approach in Chinese investments is that he seems to be putting his money where his mouth is as BABA is the top 8th position out of hundreds in the Bridgewater equity portfolio with at least $500 million invested in it.

While this is within an extremely diversified “all weather” portfolio, it speaks volumes how much confidence Dalio has in BABA as it ranks up there with his investments in consumer staples like Costco and Coca Cola and emerging markets and the S&P 500.

Only time will tell if Bill Miller and Ray Dalio will be correct. With BABA now at 5-6 year lows of around $87 per share, you have to go back to 2016 to see the same price, without even adjusting for inflation yet.

While it looks like Alibaba hasn’t hit rock bottom yet, the stock seems like it could be a tremendous investing opportunity (not advice though) if superinvestors like Charlie Munger, Guy Spier, Dalio, and Miller are to be believed.

It seems interesting to compare the financial and stock performances of cloud giants Alibaba and Amazon. From 2017-2020, AMZN quadrupled in its stock price while BABA just about tripled during the same time until Jack Ma’s infamous October 2020 speech that opened the Pandora’s box of Chinese regulatory crackdown.

It’s fascinating to study because Amazon’s revenue growth rates are generally half as good as those of Alibaba’s, but yet there is a significant discount that is placed on BABA stock.

Lets see if Alibaba will be able to find its way out of the doldrums and rise up again, so that perhaps people will be willing to put high multiples on its stock again, just like they did in the past. But who knows if these superinvestors will be right. Right now it appears to be a tall order for Alibaba to thrive in not only its performance as a company, but also as a stock in an American exchange. Can things get any worse than they are now? We shall see!

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