However, there’s another growth share that’s up 71% over the past year that I think still looks very attractive.

A pivot paying off

I’m talking about Alibaba (NYSE:BABA). The stock’s up 71% over the past year, as it has strongly pivoted to focus on AI and cloud growth, committing to invest heavily in related infrastructure.

For example, in February, it announced that it would invest at least $52bn over the next three years in cloud and AI. That signalled to the market that it’s repositioning beyond its e-commerce roots and aiming to capture the lucrative AI market.

It’s already starting to see benefits in this regard. Although we won’t receive the latest quarterly results until next week, the cloud computing division’s revenue jumped 26% year-over-year last time around.

The CEO commented: “AI-related product revenue is now a significant portion of revenue from external customers.“

In news out yesterday (13 November), the company announced it would be revamping its mobile AI app and adding features to make it more like ChatGPT. It plans to keep it free for users initially, to build a larger customer base. Yet eventually, it’ll likely charge for certain features. This is smart and provides another way of monetising AI products.

Talking about valuation

The jump in the share price this year reflects the optimism investors have, as well as the vision they share with management about how the AI pivot could play out. Yet some might be surprised that the price-to-earnings ratio is 19.71. This compares to Nvidia at 58.72.

I think this is a key factor that makes the growth share attractive relative to Nvidia and other AI-related peers. This means there’s room for the share price to rally before it becomes potentially overvalued, even if earnings per share remain unchanged.

Some have stayed away from the stock in recent years due to investor concerns about a slowdown in China and regulatory concerns. Yet I feel that this is shifting now, as more of the focus is on the immense potential in Asia for AI.

Of course, the geopolitical situation in China will always remain a risk in some form. Alibaba remains subject to Chinese regulation and US-China trade tensions. These risks could derail sentiment in the future.

The bottom line

I think few would argue that AI’s going to remain a dominant theme in the stock market for the coming few years. At the same time, the surge in interest has pushed some stocks to overinflated levels. Therefore, for investors looking to get exposure to this sector but want to be smart in where they allocate their money, Alibaba could definitely be worth considering.

The post Move over Nvidia! I think this could be the best value AI growth share appeared first on The Motley Fool UK.

The background

Apple’s been struggling in China over the past couple of years. For example, it experienced a 17% decline in annual smartphone shipments in China in 2024. This was the largest fall since 2016. Apple hasn’t been able to keep up with domestic competitors in this space, and has been further hamstrung when trying to launch new AI features in hardware such as iPhones.

In line with local regulations, Apple has to collaborate with domestic firms for AI implementations. That’s where Alibaba comes in. In working together on this project, it means that Apple can add the features.

While technical details haven’t been publicly released yet, the integration’s expected to enhance applications such as voice recognition, natural language processing, and personalised user experiences.

Why this is big for Apple

In partnering with Alibaba, Apple’s pretty much solved the issue of getting AI features onto iPhones in the country. That in itself is big win, as I’m sure consumers there are currently buying competitor products with these AI features as a key consideration to purchase. So if Apple can rectify this, sales should increase.

Interestingly, the language model for AI that Alibaba uses is specifically trained for the Chinese culture and user behaviour. I believe this is a better fit than Apple’s own in-house AI model for the local market. Therefore, it’ll be able to benefit from this tailored model without having to have spent time or effort in developing it.

Finally, the move to choose Alibaba, which is a government-backed company, is important. It certainly pays to stay on the right side of regulators. So with this move, aligning with Alibaba could help Apple maintain favour with Chinese regulators in the future.

Action from here

Apple shares are up 33% over the past year. It’s true that with the stock close to all-time highs, there’s a risk things are a little overvalued. Another specific risk is that Apple might struggle to take market share in China even with the new partnership. It could take time before we see a material increase in sales.

However, I think that for long-term investors, it’s still a good opportunity to consider right now. The size of the market that could be opened up with this new tie-up, along with the implications of working with a local business, could be a large win in coming years.

The post Why Apple stock could be set to soar with the new Alibaba partnership appeared first on The Motley Fool UK.

Undervalued quality

Currently, Alibaba trades at a striking 52.1% below a discounted dash flow (DCF) estimate. With shares changing hands at about $75 and a market capitalisation of $174.6bn, I feel that the company is currently at a substantial discount to its intrinsic worth.

This valuation disconnect stems from a perfect storm of challenges: stringent regulatory measures in China, lingering effects of pandemic-related disruptions, and persistent geopolitical frictions. These factors have contributed to a 17.5% decline in Alibaba’s stock price over the past year, contrasting sharply with the broader US market’s 27% gain.

Steady growth

While the discounted price is certainly eye-catching, the firm’s appeal extends far beyond its current market valuation. Despite disappointing performance in the market, the company’s financial fundamentals remain robust, boasting trailing 12-month revenue of $129.41bn. Even in the face of recent profitability pressures, Alibaba managed to generate earnings of $10.96bn.

Looking ahead, the growth story appears far from over. Analyst projections point to an annual earnings growth rate of 13.76%, suggesting significant potential for future value creation.

A key pillar of Alibaba’s investment thesis is its rock-solid balance sheet. With a debt-to-equity ratio of just 15.3%, the company maintains exceptional financial flexibility. This conservative capital structure positions Alibaba well to navigate economic uncertainties and pursue growth opportunities without the burden of excessive leverage. It has enabled management to buy back over 613m shares of the company in the last three months alone.

A new strategy

In a notable development for income-oriented investors, Alibaba has recently embarked on a dividend program. The current yield of 1.3% may seem fairly modest. However, the conservative 23% pay out ratio leaves ample room for future dividend growth, potentially bringing in a new field of investors.

Of course, it’s crucial to approach any investment with a clear-eyed view of the risks involved here. These include the unpredictable nature of China’s regulatory environment, ongoing geopolitical tensions, and fierce competition in the domestic e-commerce arena. However, these risks are well understood by the market. By my reckoning, this is now fairly well baked into the share price, barring any further escalation.

A lot to like

I feel that Alibaba presents a really compelling opportunity for investors with a higher risk tolerance and a long-term perspective. By many calculations, it is trading well below its estimated fair value and offers promising growth prospects.

Key factors to monitor include Alibaba’s adaptation to the evolving regulatory landscape, its ability to capitalise on China’s expanding consumer base, and the growth of its AI systems, cloud computing, and other technology services. While the journey may be turbulent, the potential reward for steadfast investors in this giant of the S&P 500 could be considerable if Alibaba successfully navigates these hurdles and reignites its growth engine. I’ll be holding onto my shares for the long term.

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However, he’s still best known as a character in the inspiring the book, The Big Short, by Michael Lewis, which was adapted for the big screen.

In a memorable scene, a stripper casually mentions owning five houses and a condo, all financed with adjustable-rate subprime mortgages — not realizing that the introductory interest rates will adjust to unaffordable levels. This sparks a revelation that the subprime housing market was a bubble.

In real life, Burry shorted (betted against) the market and made a fortune when the bubble burst in 2007/08. Today, he runs Scion Asset Management, which has recently been scooping up shares of these two value stocks.

BP

At the end of March, Burry had a position in oil major BP (LSE: BP). It was worth around 6.4% of the $103m portfolio. What did he see in the oil stock?

For one, it’s certainly cheap, trading on a price-to-earnings (P/E) ratio of 11. That’s lower than global peers and fellow FTSE 100 constituent Shell (12.8).

The firm also recently announced a hefty $1.75bn share buyback for the current quarter (Q2), while there’s a 4.9% dividend yield. So there’s a lot to like on the surface here.

Of course, like all oil stocks, BP is ultimately beholden to where the price of black gold heads. Geopolitical events and supply disruptions can push the price — and BP’s profits — one way or the other.

Alibaba

A significant part of Scion Asset Management’s portfolio is also invested in Chinese stocks. These have long been out of favour, making them attractive to Burry’s contrarian investing approach.

One stock he owns is Alibaba (NYSE: BABA), which recently made up 3.5% of the portfolio.

While BP has long been a value stock, Alibaba used to be known as a high-octane growth stock. It operates in e-commerce, cloud computing, logistics, digital entertainment, and global cross-border retail.

But it’s now fallen 53% in five years. So what’s gone wrong at the Chinese internet giant?

Well, for starters, there has been a massive regulatory crackdown on large Chinese tech firms in recent years. Alibaba was right in the firing line, receiving eye-watering fines for various monopolistic breaches.

Founder Jack Ma even disappeared for a while after criticising China’s financial regulators in 2020.

Needless to say, such things haven’t inspired trust in the sector with investors. And we can see this in the valuation. Today, Alibaba stock trades on a forward P/E multiple of just 8.9. That’s dirt cheap for a global tech firm that grew its top line by 8.3% in its last financial year.

According to the company’s latest financial report, it had $79bn in cash and equivalents. That’s a lot relative to its $178bn market cap.

My pick

Which one would I personally invest in if I had spare cash to invest? While they’re very different propositions, I’d have to go with BP over Alibaba.

The stock has a much higher dividend yield than Alibaba’s 1.3%, and appears far safer from immediate regulatory intervention.

The Chinese firm also faces mounting competition in its home market from the likes of PDD Holdings and TikTok owner ByteDance.

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What does it do?

In the bustling realm of e-commerce and technology, Alibaba is an absolute colossus. The company is often compared to Amazon in the West, as it also operates in areas including cloud computing, artificial intelligence, and even entertainment.

The ability to generate revenue from multiple sectors is always something I target when it comes to companies in my ISA. This is especially true when these areas have the potential for very high profit margins.

2023 was an eventful year for the company. It announced a split into six distinct units, came up with a dividend, and saw continued tensions in its region. In the last year alone, the share price is down over 40%.

Continued risks

Recent years have seen Beijing tighten its grip on tech giants, and Alibaba has clearly felt the heat. These regulatory challenges have led to uncertainty on future revenues, severely impacting investor confidence and the performance of my ISA. The threat of Chinese companies being entirely delisted from global markets is also never far away, spooking many would-be investors.

Market volatility is another key factor for this sort of stock. As many investors with a Stocks and Shares ISA in 2023 learned, no company is entirely immune to global economic swings and US-China trade tensions. Moreover, the competitive arena is getting tougher. Rivals in both the e-commerce and tech sectors, such as PDD, are vying for a slice of the pie in the Chinese market.

The fundamentals

Yet the gap between the performance of the company, and the share price, has been pretty notable for Alibaba. As the share price continued to decline, the company saw many of its key performance metrics improving steadily. The firm’s ability to generate and increase cash flow is seriously impressive, but the price-to-earnings (P/E) ratio of 9.7 times is now well below that of rivals Amazon at 80.2 times.

Based on a discounted cash flow, the current share price could be over 35% undervalued. Of course, there’s no reason the decline can’t continue in 2024. But at some point, I suspect many long-term investors using an ISA and having a strong stomach will see there’s a tremendous opportunity here.

Am I buying?

I’ve long been a believer in the company. I see the decline of the last few years as an unfortunate consequence of geopolitics, all while the fundamentals of the business improve steadily. In the near term, I fully expect these tensions and general volatility to continue, but I’m confident that Alibaba’s potential will win out in the end. This makes this a potential winner for my ISA. I’ll be buying more over the coming months.

The post I’m not giving up on the worst-performing company in my Stocks and Shares ISA appeared first on The Motley Fool UK.

Recently, however, the stock has been rising after the Chinese tech conglomerate said it plans to split its business into six separate units.

The shares are up 11% since this plan was announced last month. Over six months, they’re up 34%. That means I’d have £2,680 today if I’d invested £2,000 in Alibaba shares six months ago.

The company doesn’t pay dividends.

Sharks and crocodiles

Jack Ma co-founded Alibaba in 1999, starting it from his apartment in Hangzhou, near Shanghai. The fact that over the next decade and a half it managed to outcompete both eBay and Amazon in China is extraordinary.

But Ma was always confident his company would beat its foreign e-commerce rivals on home soil. He said: “eBay is a shark in the ocean. We are a crocodile in the Yangtze River. If we fight in the ocean, we will lose. But if we fight in the river, we will win.” 

Today, Ma is no longer in charge of Alibaba and the tech giant has announced it will be splitting into six separate units. These will be:

• Cloud Intelligence;
• Taobao Tmall Commerce;
• Global Digital Commerce;
• Local Services;
• Cainiao Smart Logistics; and
• Digital Media and Entertainment

It’s expected each business will eventually seek a separate public listing. However, they’ll all still be under a common holding company.

In theory, this could unlock a large amount of value for Alibaba shareholders, especially considering its low valuation. The stock currently trades on a forward price-to-earnings (P/E) multiple of just 12.5.

For one of the largest e-commerce companies in the world, I reckon that’s dirt-cheap.

Scrutiny

The company’s radical restructuring follows two years of tough regulatory crackdowns on large internet companies in China. It is hoped this split will appease regulators and reduce scrutiny in future.

That may be turn out to be true. However, I’m not convinced, particularly after seeing the regulatory response to the company’s recent unveiling of Tongyi Qianwen, its answer to ChatGPT.

This generative artificial intelligence (AI) chatbot, which roughly translates as “truth from a thousand questions”, will soon be integrated into all of Alibaba’s products.

However, China’s cyberspace regulator was quick to respond: “Content generated by generative artificial intelligence should embody core socialist values and must not contain any content that subverts state power.”

I fear the constant regulatory scrutiny (and fines) placed upon tech companies in China may eventually stop them taking bold, innovative risks.

That said, robust regulation makes it extremely unlikely that foreign AI companies will ever succeed in China, thereby cementing Alibaba’s competitive position.

Will I buy Alibaba shares?

Normally, I’d be extremely keen to invest in a firm with a market-leading position in a gigantic $2trn market (the size of China’s e-commerce market).

But to me, Alibaba serves as a reminder that a great business doesn’t necessarily make for a great long-term investment. The way that government regulation can negatively impact Chinese stocks continues to put many investors off, including me.

As things stand, there are too many risks for me to buy Alibaba shares. I’ll be investing elsewhere.

The post If I’d invested £2,000 in Alibaba shares 6 months ago, here’s what I’d have now appeared first on The Motley Fool UK.

However, with exposure to the world’s largest market, incredible innovation, and strong fundamentals, I see a potential bargain.

Diverse revenue streams

Alibaba recently announced plans to restructure. This involves splitting into six distinct units, each of which may raise capital and IPO. These units are:

• Cloud Intelligence
• Taobao Tmall Commerce
• Global Digital Commerce
• Local Services
• Cainiao Smart Logistics
• Digital Media and Entertainment

The majority of income (68%) comes from Alibaba’s e-commerce platform. However, there is enormous growth potential in expanding capabilities in cloud and payment platforms.

Generating revenue from multiple areas is a key attribute I look for when investing in a company. With the ability to grow in several directions, stay agile, and leverage specialist skills across the business, I believe that Alibaba is better positioned than most.

Growing fundamentals

Fundamentals matter when it comes to companies within the technology and commercial sectors. Excitement in new products can lead to extremely high price-to-earnings (P/E) ratios. However, with a forecast P/E of 12.8 times for Alibaba stock, this really stands out when compared to 70.1 times for Amazon, and 76.4 times for Mercadolibre.

In the latest earnings report, Alibaba signalled an intention to add a further $15bn to a $25bn share buyback program. Adjusted profit increased 5% in the last year following a consistent track record of growth over the last few years. Both indicate a company with confidence in future execution, and the financial clout to put money to work within daily operations and also in the market.

Dominant market position

Chinese consumers heavily recognise and trust Alibaba’s brand. This has helped the company maintain its market leadership position. Alibaba is second only to Amazon in terms of global market share in the e-commerce space. With AI being rapidly implemented in the full suite of Alibaba products, and increasing global use of the platform, continued growth in e-commerce is likely to benefit Alibaba proportionally more than rivals with less agile business models.

Balancing risk

Investing in China undoubtedly requires a wider consideration than just Alibaba stock itself. The Chinese government has an enormous say in whether a company succeeds or fails. The 2020 suspension of an IPO for Ant Group, of which Alibaba owns 33%, was a clear example of this.

By owning stocks influenced by the Chinese government, investors need to be comfortable with risk. Although unlikely, there is still a chance that stocks may be heavily regulated, re-structured, or even delisted. My hope is that the recent re-structuring helps to dilute some of this fear.

What now?

I think the future of Alibaba stock is promising. Although there are a variety of factors which may concern investors, the fundamentals and quality of the company is fantastic. With the re-structuring likely to raise some excitement, I will continue to add to my position in Alibaba stock.

The post Why is everyone talking about Alibaba stock? appeared first on The Motley Fool UK.

Despite being one of the most prominent Chinese technology names, investor sentiment and risk tolerance for Alibaba has faded dramatically. It’s been a volatile stock with an October 2020 high of $319 but today trades at around $72. So if I’d invested £10,000 in Alibaba stock five years ago, how much would my investment be worth today?

Not pretty

In dollar terms, Alibaba stock declined 59% over the last five years. Ouch! However, the pound has significantly weakened against the dollar in that time to increase the value of my hypothetical investment. Even with currency effects taken into account though, I’d only have £8,358.70 remaining of my £10,000 investment. I’d be down 16.41% after five years, excluding broker fees. Alibaba has never yielded a dividend that could have boosted my investment value. Below is a full breakdown.

The performance has been dismal. For context, an investment in the S&P 500 index would have returned 45% in the same period. That’s without taking into account currency fluctuations and dividend payouts. Despite Alibaba stock’s poor historic performance, should I invest in the Chinese multinational company today?

Do the fundamentals matter?

Alibaba is a company that has delivered revenue growth rates comparable to US tech giants Apple, Alphabet and Meta. Today, it looks cheap with a forward price-to-earnings ratio of just 9.28. It’s also China’s largest provider of public cloud services by revenue with plenty of room to grow. But its long-term performance could have very little to do with fundamentals and more to do with its numerous and complex challenges.

Firstly, Alibaba stock may be delisted from the New York Stock Exchange. Regulators from the US have long demanded complete access to audit working papers of New York-listed Chinese companies, including Alibaba. If this isn’t resolved, a delisting is a possibility. While this wouldn’t directly affect shareholders’ rights or claims on Alibaba, the holdings would be harder to sell and the share price could plummet. 

Secondly, Alibaba’s revenue is being hampered by Beijing’s strict zero-Covid policy. In the second quarter of the year, Alibaba posted its first ever flat year-on-year quarterly revenue growth. There are no signs of this policy easing so future growth is very unpredictable.

Finally, China-US relations continue to worsen. The US government’s crackdown on chip exports to Chinese companies will have put further pressure on Alibaba’s growth. It’s hard to see these relations improving any time soon.

This unpredictability makes it incredibly difficult to value the company. Without these geopolitical and regulatory headwinds, Alibaba stock would look like a bargain. However, I don’t feel comfortable investing in it today. Contrarian investments can deliver great returns for brave investors, but for now, I’m sticking to safer investments elsewhere.

The post If I’d invested £10k in Alibaba stock 5 years ago, here’s how much I’d have now appeared first on The Motley Fool UK.

The decline of Alibaba

In October 2020, Alibaba had a market capitalisation of $800bn, and many believed that it would be the next company to reach the $1trn valuation mark. However, from this point, everything started to go downhill. 

For one, China started to crack down on tech giants, handing out extremely large fines for anti-competitive behaviour. For example, in the quarter ending 31 March 2021, it was announced that Alibaba had been given a $2.8bn fine under the anti-monopoly act. This was the largest fine ever handed out by the Chinese government. It also represented around 4% of the company’s domestic annual sales. 

Recently, the group has also seen slowing growth, partly due to the macroeconomic environment. This includes large inflationary pressures, which may reduce consumer spending on discretionary goods. As such, alongside other growth stocks, Alibaba has dipped to a market cap of ‘only’ $300bn. Over the past year, it has fallen 50%. 

What are the positives? 

Despite these recent fears, I can still see a large amount of long-term potential with Alibaba. For example, despite the macroeconomic uncertainties, revenue climbed 9% year on year. Although this is far slower growth than previously, it is still encouraging to see some sort of growth. 

Further, China has recently signalled an easing of its tech crackdown, after Chinese officials met with some of the country’s top technology executives. Chinese Vice-Premier Liu He also signalled that these companies would receive more support from the government. Some investors have argued that this may indicate the start of a bull market for Chinese tech stocks.

Finally, I feel that the group’s international operations could drive future growth for the company. For example, in 2018, Alibaba acquired Daraz, which has expanded Alibaba’s reach into Pakistan, Bangladesh, Sri Lanka, and Nepal. The company also owns Lazada, which operates in south-east Asia, and Trendyol in Turkey. The CEO of Alibaba, Daniel Zhang, believes that these international businesses have “huge potential”. This is a very encouraging sign. 

What’s next for this growth stock?

There are many challenges facing Alibaba, yet I remain confident about the company’s long-term prospects. Revenue in the Asian e-commerce market is expected to reach over $2.6trn in 2025, up from around $2trn this year. Alibaba also trades at a price-to-earnings ratio of around 14. This is very low for a growth stock. Therefore, this is a company I would be very willing to buy and hold for the next five years. 

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1. Support overseas stock listings
2. Stabilise capital markets
3. Resolve risks around property developers
4. Speed up the process of regulating big tech companies

In doing so, the Chinese authorities have addressed three of the biggest risks that investors who have exposure to Chinese stocks face. Some — most notably Charlie Munger — were less worried about these than others. But the market’s response to today’s announcement indicates that investors are generally feeling more comfortable about the risks. Let’s take Alibaba as an illustration of all three.

VIE structure

Investors who buy the NYSE-listed entity with the ticker symbol ‘BABA’ aren’t buying shares in Alibaba. Instead, they’re buying shares in a ‘variable interest entity’ (VIE) that is a separate company that has contracts that give it a claim on Alibaba’s assets and earnings. Why does such a thing exist? Because under Chinese law, it’s illegal for Alibaba to have non-Chinese shareholders. The VIE structure is intended to allow foreign capital access to Chinese companies (albeit indirectly) and to allow Chinese companies access to foreign capital.

The risk comes from the fact that a VIE is designed to circumvent Chinese law. As such, its contracts — which are the only things it has of any value or that connect it in any way to Alibaba, the company — might not be enforceable. That would mean that shares in the VIE could be worthless if the Chinese authorities ever decided to clamp down on VIE structures. Today’s announcement that China intends to support overseas stock listings goes some way towards limiting concerns about this possibility.

Delisting

A second source of concern comes from the possibility of the US delisting Chinese stocks from the NYSE. The Holding Foreign Companies Accountable Act of 2020 requires Alibaba to submit audit documents in support of its financial statements. Otherwise, it can be delisted from the US exchanges. The trouble is, Chinese regulation prevents them from doing this. 

This concern is assuaged somewhat by the announcement that the Chinese authorities are prepared to support overseas stock listings. The details are still to be worked out, but the idea that there might be the will to work towards resolving the impasse is encouraging for investors.

Regulation

The third major risk associated with Alibaba is the threat of government regulation. Alibaba has more history than most with this threat, after it picked up a record fine last year for abusing its dominant market position. But it’s far from unique. Various other Chinese tech companies have also faced similar sanctions.

The risk of further interventions against Alibaba and China’s other big technology firms has been a source of uncertainty around the stocks. Today’s announcement that the Chinese regulators intend to make things more transparent is positive news for investors.

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