Alibaba: Ryan Cohen Is Right_老虎社区_美港股上老虎

Alibaba: Ryan Cohen Is Right

Seeking Alpha2023-01-23

SummaryThe last several weeks have seen news item after news item about Alibaba.The most recent big story was that Ryan Cohen of GameStop fame had taken a position in the stock.Some investors worried ...

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满盘红
·2023-01-23
新年快乐恭喜发财
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Initially, investors on Twitter expressed dismay at the news, joking that BABA had now officially become a meme stock. Indeed, I added a little to this discourse myself, tweeting out the following half-joking comment:My post sounds like it is expressing negative sentiment, but wasn't meant to be taken seriously. I have never been a fan of meme stocks, but I know that Ryan Cohen made big returns on his meme investments by buying early. Therefore, I didn't take his endorsements as a negative.Indeed, Ryan Cohen's buying could be seen as a positive catalyst. Whatever you think of the meme stocks Cohen is associated with, we know that he is pushing Alibaba to do more buybacks, which could create value for shareholders. There are limits to how effective buybacks can be, but given BABA's modest valuation, they could really work in this case. Alibaba currently has$29 billion in cash on its balance sheet, and generated$3 billion in free cash flow last quarter. Given that the amount of cash this business throws off, it could easily afford to do $10 billion worth of buybacks each year and not run into any solvency issues.So, we've got Ryan Cohen advocating a policy that could well work for BABA-indeed, a policy that many BABA shareholders have been wanting for years. BABA has been doing buybacks, but so far it hasn't come anywhere close to hitting the maximum authorized amount. It looks like there's room for more, and who knows how long these bargain prices will last. For this reason, I think Ryan Cohen's investment is a neutral to positive factor for Alibaba, not a negative one.Alibaba - The Buyback Situation ExplainedGiven that Ryan Cohen's activism at Alibaba consists of pushing for more buybacks, it helps to understand where Alibaba stands with respect to buybacks. The company is known to be doing buybacks this year, why does Cohen want more of them?Here's what we know about Alibaba's buyback program as it stands now:The maximum dollar value right now is $25 billion.Last year, the maximum was increased by $15 billion.BABA's annual free cash flow has varied between $7 billion and $28 billion per year.In the most recent quarter, Alibaba's management cut enough costs that FCF grew 61% year-over-year.Alibaba bought back $2 billion worth of stock last fiscal year, and $5.2 billion worth in the last six months.So, it looks like Alibaba has authorized $18 billion more in buybacks than have actually occurred. Why are the buybacks proceeding so slowly?It all has to do with the distinction between authorized and actual buybacks. A company may authorize its executives to do buybacks for any number of reasons, a simple awareness that the company can afford buybacks may be enough for them to do so. Actually doing a buyback is a very different story. If a company has $29 billion in cash and $68 billion in liquid assets, like Alibaba does, it can certainly afford a buyback. But if it has a $68 billion M&A opportunity that it thinks it can triple its money on quickly, then that might be a better use of funds than a buyback. It is well known that Alibaba is investing large sums of money into its Cloud business right now, aiming to make it the AWS of China. AWS has been a huge success for Amazon (AMZN), adding $5.4 billion per quarter to the bottom line, so it should come as no surprise that BABA's management keeps investing in the cloud. It could prove a big winner over the long run, possibly a bigger winner than $18 billion worth of buybacks would be.Why Cohen is Right About Buybacks in PrincipleIf Alibaba's management thinks that investing in its business is a better use of funds than doing buybacks, I won't disagree with them. With that said, Ryan Cohen is correct in principle that buybacks would provide value to Alibaba's shareholders. Generally, when a company is profitable, growing and cheap, buybacks will make it more valuable. With that in mind, here are some key metrics on Alibaba's valuation, growth and profit that demonstrate its stock is worth buying at today's price.ValuationAlibaba is cheaper than most tech stocks, and cheaper than the S&P 500. Its key valuation ratios include:P/E: 15.8.Price/sales: 2.6.Price/book: 2.3.Price/operating cash flow: 14.2.These multiples are all lower than average. For context, the S&P 500 trades at 20 times earnings and 3.7 times book value. So, we've got Alibaba trading for less than a typical U.S. stock here. Sounds good, but is Alibaba growing? Let's take a look.GrowthAlibaba's revenue growth has slowed considerably thanks to China's zero COVID policy. With lockdowns crushing demand, its trailing 12 month revenue growth slipped to 5.5%. However, the company cut costs, resulting in the following growth rates in the most recent quarter:Operating income: up 68%.Free cash flow: up 61%.Adjusted net income: up 19%.Pretty strong growth observed here. Obviously, growth from cost cuts tends to be a one-time affair, but now that China's Zero COVID policy is officially over, we could see the top-line growth return.ProfitabilityFinally, we have profitability. Alibaba has always been a very profitable company, boasting the following profit metrics for the trailing 12 month period:Gross profit margin: 36%.EBIT margin: 11.2%.FCF margin: 6%.Net margin: 1.6%.Obviously, the net margin is a bit weaker than the other metrics, but remember that Alibaba owns a stock portfolio that has been holding back GAAP net income recently. Swap out GAAP net income for adjusted net income and that figure swells to about 10%.Ryan Cohen's Track RecordHaving demonstrated that Alibaba is a cheap, profitable, and fast growing company, it's now time to look at who has been buying it.Ryan Cohen is the most famous person to invest in Alibaba recently. Best known for his involvement in meme stocks, Cohen's name doesn't necessarily inspire a huge amount of confidence.However, after doing some research, I determined that Ryan Cohen's investing track record is very good. Here's what we know about Cohen's investments:He got his start by founding and growing the company Chewy. He sold it for $3.5 billion.He immediately invested the sales proceeds into Apple (AAPL) at $38.25 and Wells Fargo (WFC) at $46.He achieved a 255% return on Apple and a mildly positive return on WFC if you include dividends.He invested in GameStop (GME) and is sitting on an 890% return.He bought Bed Bath &Beyond (BBBY) and sold at a 56.3% return.Below is a table showing Ryan Cohen's recent investment results. As you can see, he doesn't have a single loser in his portfolio.InvestmentCohen's buy priceCohen's sell priceReturnAAPL$38.25No sale (currently $136)255%WFC$46No known sale (currently $43.5)10.3%GME$2.1$20.79890%BBBY$15.56$24.3356.3%A note on how I calculated Cohen's Wells Fargo return:WFC stock has paid $7.26 in dividends since the first half of 2017. The stock has declined from $46 to $43.5. Therefore, we have a positive $4.26 return ($7.26 in dividends minus $2.5 in capital losses) for a percentage return of 10.3%, assuming no reinvestment.So, basically, Ryan Cohen is up on all of his investments since selling Chewy. His involvement in meme stocks may give off bad optics, but remember that he got into GME extremely early; he was not one of the people calling for the stock to go to $500,000 or anything like that. So, we have evidence of a good capital allocator here. His endorsement of Alibaba is not a negative for current shareholders.The Bottom LineThe bottom line on Ryan Cohen's investment in Alibaba is this:It is no thesis-breaker.In fact, it's arguably a slight positive. If you look past the unflattering nature of some of the names Ryan Cohen has bought, you see a capital allocator with a good track record. Cohen got his start buying Apple and Wells Fargo-two value investor favorites-and he made his money on meme stocks by buying long before those stocks entered their speculative mania phase.In the meantime, we've got Alibaba trading at a cheap valuation, and growing its cash flows at a rapid pace. Who knows whether Cohen's proposed buybacks are really Alibaba's best use of funds, but we can say for sure that they wouldn't hurt.Taking everything into consideration, I'm quite comfortable being in Alibaba stock alongside Ryan Cohen. Maybe Cohen will trigger a flurry of buybacks and retail cloners that take the stock to absurd heights, maybe not. My thesis was never based on that outcome anyway. I'd be quite content to see BABA slowly grind up at 20% CAGR over the next three years, which is what I expect to happen.This article is written by Growth at a Good Price for reference only. 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