Alibaba stock: Charlie Munger not worried about delisting (NYSE: BABA)

maybe a mistake

Shares of China’s e-commerce company Alibaba Group Holding Limited (New York Stock Exchange: Baba, OTCPK: BABAF) slipped 11% last Friday after the SEC added the company to its list of potential candidates and wrote off panicked investors. But one investor does it He doesn’t seem to be bothered by the dangers of delisting from Alibaba: Charlie Munger. In a recent 13-F holdings report, The Daily Journal Corporation (DJCO), which is supervised by Charlie Munger, has not sold any stock since its last report. Delisting risks are grossly exaggerated and irresponsible and Alibaba represents great value in the sale!

New threats from the SEC

The Securities and Exchange Commission added Alibaba to its list of potential candidates last Friday, causing pressure on Alibaba’s stock. Under the Foreign Holding Company Accounting Act, US stock exchanges can write off the securities of (foreign) issuers if the company’s public accounting oversight board is unable to examine audit papers of companies located in a foreign jurisdiction. Foreign companies—mostly Chinese companies listed on ADS on a US stock exchange—could be disqualified by the Securities and Exchange Commission if they fail to undergo PCAOB audits for three consecutive years.

The SEC has not specifically mentioned Alibaba before, but it is now on the SEC’s list of potential delisting candidates. However, this does not mean that delisting is imminent. It just means that the Securities and Exchange Commission has identified Alibaba as one of several companies that could be delisted if certain disclosure and transparency requirements are not met in the future.

Why there is no reason to worry about being removed from the list

Alibaba is seeking a dual primary listing on the New York Stock Exchange and the Hong Kong Stock Exchange. Alibaba expects to complete the initial listing process in Hong Kong by the end of the year, at which point Alibaba will have moved from secondary to primary status. Hong Kong’s basic listing status comes with stricter reporting rules, but it also allows participation in Hong Kong’s “share linkage program” which will allow Chinese investors to buy Alibaba shares in Hong Kong through their mainland exchanges.

Therefore, even in the worst case of the forced delisting of the United States, American investors can still buy and sell their shares on the Hong Kong stock exchange. The inclusion in the Stock Connect program likely indicates an increased investor demand for Alibaba shares from mainland Chinese investors as well.

Charlie Munger is not worried about getting off the list

Charlie Munger, chairman of the Daily Journal Corporation, is unfazed by the possibility of the possible delisting of Alibaba’s ads from the US stock market. According to the company’s latest 13-F contract report, the company has not sold any shares since the previous report and still owns 300,000 shares in Alibaba, now worth $27.8 million. The portfolio went on to include only five stocks: Bank of America (BAC), POSCO Holdings (PKX), US Bancorp (USB), and Wells Fargo (WFC). The Alibaba holding company represented about 20% of The Daily Journal Corporation’s portfolio and was the third largest after Bank of America and Wells Fargo.

13-F The Daily Journal Corporation

Edgar Database: 13-F The Daily Journal Corporation

The value of Alibaba’s e-commerce is enormous, but margins may see downward pressure in the short term

With 1.4 billion Chinese making up Alibaba’s core market, Alibaba operates in the world’s most attractive e-commerce area. Alibaba had 1.3 billion customer accounts on its various platforms and only added 28 million new accounts in FQ4’22. The scope and reach of Alibaba’s e-commerce platforms, which includes retail brands in Pakistan, Turkey and Southeast Asia, is unparalleled and constitutes the core value of Alibaba’s growing e-commerce enterprise.

Alibaba: Active Accounts FQ4'22

Alibaba: Active Accounts FQ4’22

Alibaba has experienced a slowdown in the e-commerce industry in the past two years. With COVID-19 a drag on growth, the e-commerce company only posted 9% year-over-year revenue growth in FQ4’22, the slowest growth for Alibaba since it went public in 2014.

Due to top line challenges, Alibaba will have to cut costs and double down on the business that is currently doing well for the company such as direct sales and the e-commerce wholesale segment in China.

Faced with a more challenging macro environment and the very real expectation of revenue growth falling into negative territory in FQ1’23, Alibaba may face calls to renew its cost structure. Alibaba’s costs rose despite pressure on the company’s top line, with cost of revenue increasing 5 points per second year-over-year in Q422, and sales and marketing expenditures growing 3 points each time.

Alibaba: Cost Trends FQ4'22

Alibaba: Cost Trends FQ4’22

With costs rising and revenue falling, Alibaba’s margins will likely go through a longer period of contraction…at least until revenue growth rebounds. Alibaba’s profit margins have shrunk over the past three years, as a result of increased competition in the e-commerce industry.

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Alibaba operating margin [TTM] Data by YCharts

What is Alibaba expected to offer?

Alibaba is expected to report earnings in FQ1’23 before the market opens on August 4, and the appreciation trend is very negative. In the last 90 days, there have been 7 downward revisions of EPS and only 2 revisions up, which means the expectations for revenue growth and EPS are too low for the upcoming earnings card. As China saw widespread COVID-19 shutdowns in the second quarter – Alibaba’s FQ1’23 – investors may have to prepare for the quarter with low single-digit or even negative revenue growth.

Seeking Alpha: Alibaba estimates FQ1'23

Seeking Alpha: Alibaba estimates FQ1’23

Big discount on e-commerce growth

Alibaba’s top line growth is moderate and the outlook is skewed toward the negative. In the worst case, China’s coronavirus shutdown may have resulted in negative revenue growth for Alibaba in the last quarter. However, a rebound is expected in the coming quarters as China eases COVID-19 restrictions. Despite these challenges, Alibaba is expected to bounce back with a 13% revenue growth in fiscal year 2024.

Alibaba’s growth potential was significantly reduced on Friday, and since the stock has yet to recover, Alibaba shares are trading at a P/S of 1.6X and a P/E of 10.6X.

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Data for BABA PE Ratio (Forward 1y) by YCharts

If Alibaba generates FQ1’23 earnings and revenue on August 4, the stock may be revalued to the downside. As I expect results to improve in the second half of the year due to the easing of the COVID-19 lockdowns, however, I will be a buyer of any significant post-earnings dip.

Alibaba dangers

Alibaba faces many risks, but writing off its ads is not among them. The e-commerce company is likely to report a slowdown in top-line growth in its domestic e-commerce business, and because of this, margins may come under further pressure. This may result in a lower valuation factor for Alibaba stock in the short term, but any sell-off is also likely to lead to an attractive buying opportunity. What will change my mind about Alibaba is if the company notices a material decline in its free cash flow prospects and suspends its share buybacks.

last thoughts

Charlie Munger appears not to be concerned about Alibaba’s ADS delisting, and the revitalized delisting discussion is clouding investor perceptions: even if the shares are delisted, investors can simply swap their shares and buy/sell Alibaba shares in Hong Kong.

Although the exit from the US market may affect Alibaba’s valuation in the short term, a much bigger issue for the company is the upcoming earnings release which could see a serious (temporary) slowdown in revenue growth and increasing pressure on profit margins. Alibaba shares are unreasonably cheap given the company’s large account base and potential in the e-commerce market, and I believe they have a very attractive risk profile under $100!

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