Alibaba (BABA, 9988 HK) listed in the U.S. on September 19th 2014. Those who secured an allocation at the IPO price paid U$68.00. Others could have bought when the stock opened that day at U$92.70.
The majority of today’s holders though paid a long way north of both these prices and now, with the stock closing last night in New York at U$63.15, would be a good time to review what’s gone wrong.
In 2014, well before the IPO, there were red-flags the cautious would have noticed. For me, a single one would bar a stock from consideration so I passed and, as many of those flags have continued to flutter, I’ve swerved ever since.
Alibaba is a good example of problems common to a raft of China stocks listed in recent years with similar characteristics, but here I’ll confine observations to this stock specifically.
Hopefully, using Alibaba’s stock-price fall as a teachable moment, future investors may be spared the deleterious financial-health effects experienced by those who’ve tangled with this asset class to date.
I want this to be a short note so won’t elaborate on points below, most of which are now self-evident. When the stock was in the ascendant investors, analysts and boosters claimed these issues didn’t matter, this time it was different or weren’t relevant-to-valuation.
Well, and to continue in the spirit of brevity, d’oh!
So let’s get to it. There were eight major red-flags a commonsensical investor would have observed prior to BABA’s IPO back in 2014 and ANY ONE of them should have given the cautious serious pause.
These were, and remain, matters in plain sight and one didn’t/doesn’t need to be a China, tech, internet or retail specialist to spot them.
They were/are:
- Character. Not only had there been a major transaction in 2010 that hinted at a capacity for sharp dealing (Yahoo-Alibaba ‘spat’) but the ownership and control structure was highly unusual, and remains so.
- Opacity. Ownership and control is just one example (interesting work here on that Who Owns Alibaba). Listing documents were, and reporting since has been, dense and/or unhelpful.
- Profitability. It wasn’t widely accepted in 2014, but is better understood now; there’s no reliable relationship, especially for start-up companies, between revenue and profit growth.
- Negative optionality. In happy times a business with many parts is a fountain of benevolent expectation. In trickier times these assets cross the balance sheet and become liabilities.
- Government interest. In China, its good not to be noticed. A big business affecting hundreds of millions of souls is bound to attract government attention, most likely not of the benevolent variety.
- A mis-sold asset. Investment marches to a U.S.-centric beat so assets are an easier sell if they look like something there. BABA was presented as the ‘Amazon of China’. It wasn’t then, and isn’t now.
- Passive darling. The size of the company guaranteed large funds would need an allocation. It would have been clear then future returns were likely to be flow, not merit, based.
- U.S. listing. The movie The China Hustle was released in 2018 and documented what pretty-much EVERYONE connected with U.S. listed China stocks knew, and certainly did back in 2014.
Behind Alibaba’s poor stock-price performance there are real business making real profits and maybe, someday, it’ll be possible to calculate a stock price target with a margin of safety? Maybe, someday.
However, unless or until problem-concerns can be resolved I’ll continue to treat this stock (and others like it) as an unalysable pass; and expect to continue in relatively better financial-health as a result.
Nial Gooding
Tuesday, October 25th 2022