What is going on guys? Nick here, back with another video.
A few months ago, I looked at Alibaba stock, and I was shocked at just how cheap the stock
was relative to what I thought the stock should be worth at the time. I was so surprised, I
ended up buying a Leap on them, especially after it was announced that Charlie Munger
had opened a big position in Alibaba himself.
I thought it was a great deal, and the stock started rising, and a couple days later, my
$4,000 leap was already up to $5,500 a few weeks later.
But in December, the stock market and Alibaba stock became very volatile. And the stock
ended up falling all the way back down to $110.
There's been a lot of discussion about the stock lately, with Charlie Munger doubling
his position. So in this video, I'll show you guys what I found after taking a deep
look into the company, and ultimately why I changed my opinion on Alibaba stock.
To understand Alibaba and the issues it's facing, we have to understand what's going
on with the Chinese economy right now.
The Chinese economy is facing some serious challenges right now.
Chinese people don't keep their retirement savings in the stock market like we do in
the US. Instead, retirement money has been put into real estate. Which has been seen
as a safe investment. But the problem is all of this real estate investment has driven
demand for new construction. Which has pushed the housing supply so out of control that
entire cities have been built with no actual demand materializing, resulting in ghost towns
with no residents. Right now, nearly 3/4 of all household wealth in china, is in housing.
Unsold housing in China's 100 biggest cities rose to the highest in five years in November
2021. On top of this, and probably pretty unsurprisingly, demand for housing, and real
estate in China is showing signs of slowing.
You may have heard about the Evergrande debt crisis in China. To catch you up really quickly,
Everglade is one of China's biggest real estate developers. But the company is facing serious
debt issues. They have more than $300B in outstanding financial obligations, hundreds
of thousands of unfinished residential buildings, and angry suppliers who have shut down construction
sites over missed payments. The company has gotten desperate to cover its debt, so it's
started to pay bills with unfinished properties and asked employees to lend the company money.
3.8M jobs and hundreds of thousands of employees will be impacted if Evergrande collapses. And
the damage wont be limited to just them. If the real estate bubble pops, the individual
citizens of china stand to lose a lot of their wealth.
The Chinese government is committed to protecting China from an economic crisis. However, you
have to remember this isn't a capitalist system. While they definitely have allowed some aspects
of capitalism to exist within their country, they still are a communist state with tight
economic control.
President Xi says the communist party will pursue "common prosperity," which will require
businesses and entrepreneurs to help cut the wealth gap in China.
In September, Alibaba, who has been under the microscope of the Chinese government for
some other reasons I'll get into in a minute, announced they would invest $15.5B for "Common Prosperity
."The money is supposed to provide insurance protection for gig economy workers like delivery
and ride haling drivers.
In October 2020, Alibaba's founder, this guy Jack Ma, spoke at a Shanghai conference. During
his speech, he criticized the Chinese financial system, saying that "Good innovation is not
afraid of regulation, but fear of outdated regulations."
Ma went on to criticize the banking system saying their way was outdated. And this criticism
came in front of senior Chinese government officials present at the conference.
President Xi, who was not present, but of course, heard about the comments, was reportedly
furious with the statement.
Xi directed Jack Ma's business group to be punished. First Ma's Ant group was forced
to withdraw from its stock IPO. The government created new rules to comply with before going
public. These new rules included being reclassified as a financial holding company overseen by
China's Central Bank. These rules were expected to cut Ant's Growth and profitability.
At the same time, the Chinese government launched an anti-trust probe into Alibaba,
which was completed in April 2021, and fined Alibaba $2.8B.
But the crackdown on big tech hasn't stopped with this anti-trust probe.
The government has been pressuring Alibaba to sell off investments and some of its media
assets. Bejing is focused on reducing the potential influence of big tech on public
opinion, which is why Alibaba's investment in the largest English-speaking newspaper
in Hong Kong would have to go.
They've also been forced to sell their stake in Weibo, a state-owned media company similar
to Twitter.
And the regulations have continued. The Chinese government is considering blocking foreign
IPOs if authorities deem them threats to national security. And they may be required to divest
assets to "eliminate or avoid the impact of overseas investment regulations on national
security."
Which leads me to another big concern with is delisting. The US government is planning
to enforce regulations on Chinese companies who list themselves on US stock exchanges,
by forcing them to submit their financial audits for review. Many Chinese stocks will
be impacted by this enforcement if some sort of deal is reached since the Chinese government
refuses to allow financial audits on the basis of national security. And with this recent
regulation blocking foreign IPOs, it seems like china is not going to budge.
This would mean that Alibaba shares could get moved to the over the counter market,
where stocks dont really get supervision, and often has less access to invidivual investors
than stocks on the big US exchanges. This could mean there’s just less liquidity as
trading volume drops, and it’s possible the stock sees a lower share price if it’s
traded on the OTC market because of less liquidity, and less oversight.
My concern with Alibaba is as the Chinese economy struggles to find growth and deals
with a massive devaluation in housing supply and individual wealth. It seems like the government
will fix the problem by forcing big businesses in China to support the people through common
prosperity.
I find it really hard to see a company like Alibaba being allowed to grow like it has
in the past, making more and more profit every year, while the country faces economic challenges.
It also seems like President Xi wants to cut the power and influence these companies have
over the country and I dont really see why they would spare Alibaba's profits with this
goal.
It may be very true that Alibaba is very cheap compared to its trailing valuation. But that's
only if you use conventional valuation measures, and don't adjust for risk. The risk is how
far the Chinese government is willing to go to reduce the power and influence of Alibaba,
and how far they are willing to allow Alibaba to continue to grow going forward.
For me, this is why I'm out on Alibaba. It seems like the entire direction of the Chinese
government is moving away from allowing these big tech platforms, especially big tech companies
whose founders its very angry at, to grow and make more and more money, while also becoming
more influential politically.
Now I know Charlie Munger believes in them, and right now, it's his 3rd largest holding.
However, his 2nd largest position is Wells Fargo, and I don't think anybody is about
to open up a huge position in them with all of the balance sheet restrictions they still
deal with, and the lack of upside. Charlie Munger is 98, I'm 31, I don't think I should
invest the same way as Charlie, since we have way different time horizons.
Ok, so thanks for watching guys, I know I didn't give you a stock analysis on this like
I usually do, but I honestly don't want it to distract from the point of this video,
which is to talk about the risks. If Alibaba was a US company, I would say the stock is
cheap. But you have to discount the risk they face as a Chinese company facing an angered
authoritarian communist government focused on it's common prosperity plans.
Before you go, make sure you check out this video right over here next, and as always
thanks for watching!