Alibaba (BABA) Update: Almost 1 Year Later (August 12, 2015)

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It’s been about 1 full year since Alibaba (BABA) went public, delivering the largest initial public offer (IPO) in history. At the time, there was a lot of hoopla and fanfare, especially in the mainstream media. I didn’t know much about the stock but all I kept hearing was that this company was the next Amazon (AMZN), eBay (EBAY), and Paypal (PYPL) all rolled into one.

Further, Alibaba was supposedly a juggernaut in China with big plans to expand its reach into many more emerging markets. Everything sounded real good, and I guess you could say that I got caught up in the buzz along with most everyone else. Jack Ma appeared to be a very sharp leader as well, and listening to him speak further encouraged me to believe in his grand overall vision for the company.

Jack Ma recently stated, as a joke to a Walmart executive:

“I said we’ll make a bet, in 10 years we’ll be bigger than Walmart on sales.”

“If you want 10,000 new customers you have to build a new warehouse and this and that. For me: two servers.”

I don’t typically purchase stocks on the day of IPO, but I couldn’t resist with this one and purchased 100 shares on opening day for about $100/share. About 1 year later, I now own 400 shares

So, what’s the jury 1 year later?

Earnings Report

The stock was down 5.09% today (closing at $73.40/share) on a disappointing earnings report.

  • Total revenue came in at $3.265 billon, which is up 28% Y/Y, but it fell shy of analysts’ target of $3.32 billon. This was the slowest growth in 3 years…
  • Earnings per share (EPS) came in at $0.59, which beat the street by $0.01.
  • Gross merchandise volume (GMV) grew 34%, the slowest growth in 3 years…
  • Mobile revenue was up 225% Y/Y.
  • The company will implement a share-buyback program of $4 billon over the next 2 years.

In addition, 1.579 billon shares will become available when the lockup expires this upcoming September 19, available for trade on September 21.

CEO Daniel Zhang had this to say:

“We had a strong quarter and we continued to build the foundations for future growth. We focused our efforts on building healthy GMV growth, delivering the best consumer experience, and improving the quality and sustainability of merchants doing business on our marketplaces,” said Daniel Zhang, Chief Executive Officer of Alibaba Group. “We are excited about our top strategic priorities, including internationalization, winning in mobile, expanding our ecosystem from cities to villages, and investing in core technologies that will propel our cloud computing business.”

“We executed very well in the June quarter. GMV grew to US$109 billion, a year-on-year increase of US$28 billion,” said Maggie Wu, Chief Financial Officer of Alibaba Group. “We also made significant progress monetizing our mobile traffic, with our mobile revenue exceeding 50% of our total China commerce retail revenue for the first time. Again, we have generated strong free cash flow of US$1.5 billion this quarter. We continue to execute our growth strategy and focus on long-term value creation. The fundamental strength of our business gives us the confidence to invest in new initiatives, add new users, improve customer experience and expand our products and services.”

Year-to-date (YTD) BABA is down about 30%, which makes its performance mirror that more of oil and energy stocks than an up and coming high-tech powerhouse. In contrast, AMZN is up 70% this year.

Thoughts

Well, I got into Alibaba as a speculative play on the future growth of China and other emerging markets. To date, nothing has changed on that front, and the company has been busy investing for the future.

Here is a brief summary of activity, which only accounts for a few moves:

  • $200 million investment into Snapchat.
  • $590 million investment into Meizu Technology Corp. to get into the smartphone business.
  • $100 million investment into Mei.com, a luxury based online shopping portal in Shanghai.
  • $194 million investment into China Business News (CBN).
  • $200 million+ investment into SingPost, a logistics and delivery company based in Singapore.
  • $4.6 billon investment into Suning Commerce Group, a Chinese electronics brick-and-mortar retailer.
  • $1 billon potential investment into Micromax, an Indian mobile phone maker.

The company is also planning for international expansion. It hired Goldman Sachs executive Michael Evans as president.

Even Macy’s is launching an online store on Alibaba’s Tmall! Macy’s will be the first U.S. department store to join Tmall Global.

That’s a flurry of activity in a reasonably short amount of time…

Although the stock price has been taking a beating (the combination of a “bad” earnings report and the devaluation of the yuan didn’t help the stock price any this week), I’m still optimistic about the future of this company. Analysts’ expectations aside, I don’t see how a company growing revenue by the clip of 28% Y/Y is exactly “bad” news… By no means is Alibaba a start-up company, but there’s still ample room for growth (especially in emerging markets), which is the primary reason why I’m investing in this stock.

So, I will remain patient with this investment. It will take a few years for the company to get to where it wants to be headed. But Alibaba is well-rounded with its fingers in many pies: e-commerce, online, media, entertainment, financial, etc. And the Chinese middle-class only continues to grow…

As an investment, the story still remains sound. As a “get-rich quick” idea, it’s been a LOUSY trade (unless you were shorting it!). If I’ve learned anything, it’s mostly this — Buying into IPO hype is probably not the best of ideas… There are far too many emotions at play which will most likely drive the stock price higher and higher… The retail mom and pop investors (and me) will chase it all the way up, and then the smart money will quietly exit out, leaving the suckers holding the bag…

As always, it’s never a good idea to make speculative bets with any capital that you need for living expenses, investments, and emergencies. I threw a lot of “play” money at this stock, and the results have not been good so far… Although my portfolio has taken a large hit, I am grateful that I did not allocate anything more than capital that I could afford to lose.

But hopefully things will rebound in the near future… That may take some time, but if BABA can pull a Facebook (FB) and recover from its initial IPO beat-down, a lot of folks will be smiling!

It’s gonna take some strong hands to overcome this initial wallop. But I remain optimistic. 🙂

 

Happy Investing!

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Portfolio Update: New Additions and Subtractions (October 13, 2015)NunoEngineeringChefDofuUncle Cheese-it Recent comment authors
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No Nonsense Landlord
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BABA may be good, in time, but not now. You are betting on the Chinese government to provide accurate (and believable) earnings. Indexing is just too easy and tried and true. All the big names advise it. Buffet, Bogle. I would advise you to switch to using indexes. It’s boring, but works. Here is my YTD performance for 2015. As of 7/31/2015. The S&P was at 3.35%. So I beat it with indexes, mostly by dollar cost averaging. After tax account 4.69% (cash, IVV, IVW,DVY,PFG) Rollover IRA 6.58% (IVW) Roth 6.32% (IVW, IWM, QQQ, FHLC,GLD) Combined 5.43% 401K – 4.02%… Read more »

Nuno
Guest

Thanks for sharing. Do you keep historical returns vs S&P of your investiments?

Jon
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Jon

Man, you shouldve invested in a boring dividend stock like coke or McDonald’s instead…

mark
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mark

congratulations if you bought MCD two years ago your up a whole $2/share!!!! In fact if you bought anytime since 2011 your mostly flat with your capital gains. Sure you got your paltry 3.5% dividend that your taxed at a higher rate for….but the market has done leaps and bound above that. KO similar story.

Check out FI’s post about networth vs cash flow. He’s right. I’m not against dividends but you cant earn a measly 3-4% and expect to get wealthy from that.

Mark
Guest
Mark

if you are confident that this is a strong play why not add more shares? that tells me you are not confident. By the way, WMT is still a strong play. It is not baba. In fact because the yuan is tanking WMT can buy goods at better rates with their strong USD. woo hoo baby!

Martin
Guest

I got into the exactly same trap, I would say. I also believed in BABA, but I no longer believe in that company. So I sold (fortunately I got out break even). I do not plan on getting back on this baby at all.

bob
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bob

Sometimes you gotta gamble to win big!

Financial Samurai
Guest

It’s been a tough one.

I’m impressed you have a $30,000 position in the stock based on your existing overall investments. How many positions do you have total?

Time to double down?!

Uncle Cheese-it
Guest

Well, we’re all humans after all. Yes, emotions should be completely removed from the equation when trading stock….”Should”… I think every investor have, at some point, bought a stock because the name sounded good, the CEO looked great or the logo was pretty cool. I’m exaggerating a little bit, but that’s ok, that’s part of the game 🙂 This is why we diversify and don’t put more than 7-10% of our portfolio on one company. This being said, you have all the reason to believe that BABA is a great long term choice, and yes, your advice to stay away… Read more »

Dofu
Guest

What’s your average cost basis for BABA now? I think you are fine, with the crazy cash pile you have, you should consider nibbling from here and continue to nibble if you see further moves down. After Sept 21, when the lock up period is over, there may be even much greater opportunities to start munching (more than nibbling). BABA has a huge moat, so I would not even worry at this point especially if you have a 5 year horizon. The other one I’m nibbling on is BIDU, that too will only go up long term because of its… Read more »

EngineeringChef
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EngineeringChef

I’m glad I’m not the only person to have lost significant money on this trade. LOL!! Good luck 🙂

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[…] I mentioned in a previous update, I still think that shares of BABA will do very well over the next few years, and perhaps decade. […]

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