Here’s why investors should consider adding the Chinese tech giant to their portfolios.
Alibaba (BABA -1.82%) stock is becoming more popular with billionaire investors. Two well-regarded hedge fund managers greatly increased their stakes in the company during the first quarter.
David Tepper of Appaloosa Management made the Chinese e-commerce giant his top holding after more than doubling his position in Q1. Alibaba now represents about 12% of his portfolio. Tepper is worth an estimated $20 billion, according to Bloomberg.
Michael Burry of Scion Asset Management, meanwhile, increased his stake in Alibaba from 75,000 shares to 125,000 shares, making it his second-largest holding behind its peer, JD.com. Burry is best known for his bet against the U.S. housing market before the subprime mortgage crisis struck in 2007, and is one the subjects of the book and movie, The Big Short.
Let’s look at what is attracting these billionaires to Alibaba’s stock, and consider whether retail investors should follow their lead and pile into the stock.
A cheap turnaround candidate
One of the first things that stands out about Alibaba today is just how inexpensive the stock is. While the stock is up about 12% year to date, the company has had a difficult few years. Its share price is down by about 50% over the past five years, and down more than 70% from its late 2020 peak. Operationally, it has grown its revenue in each of those years, but the stock has continued to drift lower.
This combination of circumstances has resulted in the stock now trading at a forward P/E ratio of only 10.5. This is a low valuation for a company that is still growing.
BABA PE Ratio (Forward) data by YCharts
On top of that, Alibaba generates copious cash and currently is sitting on a cash hoard of $85.5 billion. That’s a lot of cash, both on an absolute basis and as a percentage of its market cap, which is around $211 billion. Excluding its cash, its forward P/E would drop closer to 6.
That much cash carries with it a lot of opportunity. With the stock trading at a cheap valuation, Alibaba management has a nice opportunity to buy back shares on the cheap. And it did repurchase $4.8 billion worth of its stock in the first quarter after buying back $2.9 billion in Q4. It also authorized a fresh $25 billion repurchase program earlier this year.
The company is also well-positioned to reinvest in its business. Its efforts on that score showed up in its Q1 report and commentary, where the company offered some detail about how it had spent across its various businesses to spur growth.
Management has started to let its main business units run more independently so that they can make their own decisions more quickly and invest where it’s needed. This led to some early signs of a turnaround at various units, including e-commerce, cloud computing, and in international cross-border retail and logistics.
A bet on China
Tepper and Burry’s investments in Alibaba are also bets on China. Both fund managers hold other Chinese stocks in their portfolios, and they are clearly eyeing a rebound for the world’s second-largest economy.
The Chinese economy has struggled since the country ended its extensive COVID-19 lockdowns, which it continued to impose well after most other nations had loosened their policies.
However, the Chinese government has been actively trying to stimulate its economy. Most recently, it announced a plan for the issuance of 1 trillion yuan ($138 billion) in “ultra-long special treasury bonds.” The bonds will be issued over the next several years, and the funds they raise will be aimed at modernization and innovation-driven development.
The government also just lowered the minimum down payments on mortgages and removed the interest rate floor for first and second homes to help improve China’s troubled housing market.
An improved Chinese economy would go a long way to helping boost Alibaba’s prospects given that e-commerce is its largest business. Its Tmall and Taobao e-commerce platforms are two of the biggest in the country and have been feeling pressure from increased competition. However, Tmall tends to be a higher-end retailer offering established brands, and should see a nice lift when the Chinese consumer starts to feel more confident.
Image source: Getty Images
Is it time to buy the stock hand over fist?
Alibaba is undeniably cheap and holds a large cash position. While the company’s growth rate has slowed, it is still growing, and has been making investments to help spur future growth. Given that, it is a great stock for retail investors to consider adding to their portfolios.
However, as a Chinese company, it faces added risks and is ultimately beholden to the Chinese government. For that reason alone, I may not be buying the stock hand over fist, but I certainly think it is a stock to buy.