Alibaba is one of the biggest e-commerce companies in the world and it's still
growing rapidly today despite its gargantuan size but does this company deserve a spot
in your portfolio? we recently did an hour-long deep dive into this business
here's everything we found out my name is brian feraldi and my name is brian stoffel
Alibaba is a $350 billion company that trades under the ticker symbol
b-a-b-a baba Alibaba's mission statement is to make it easy to do business anywhere this is a
mission statement that both of us loved the best way to understand this business is that it's a
combination of an amazon and ebay of china the company's consumer to consumer business taobao
was its first foreign e-commerce but Tmall which is business to consumer much more like amazon
is also a huge part of sales over time alibaba has used its gargantuan scale to launch new business
units and recently has entered things like cloud computing wholesale logistics consumer services
and even entertainment and media as of the third quarter of 2021 it's clear that chinese e-commerce
is the major driver for this company accounting for over 60% of sales but many of those secondary
businesses are growing very fast and the two that we're most excited about are the foray
into international areas and cloud computing alibaba's business model has evolved over time
just like it has at amazon but this company earns revenue from several different categories because
alibaba is so large and popular in china customer acquisition costs are relatively low demand is
normal and can depend on macroeconomic conditions and the vast majority of revenue is recurring
like amazon and ebay this company benefits from network effects and with more than 1.2
billion consumers on its platform network effects is a major competitive advantage for this company
we also want to call out the fact that this is the third largest global cloud computing giant in fact
it's bigger than google cloud and because of that we think that there are switching costs involved
with that part of the business alibaba has spent billions to build warehouses all across china and
it's rapidly opening new ones in international locations we think that gives the company an
advantage over rivals however it's worth noting that companies like jd.com also have logistic
networks of their own as we already touched on alibaba has a very strong brand within china it
is the first destination people go to when they're looking to buy something online and even with this
company's gargantuan size it is still rapidly adding new consumers and services all the time
we think that this company's moat is actually expanding when we look at the company's financials
we see that the top line growth has been quite impressive growing at a 36% clip over the last
year and a half like many e-commerce businesses gross margin here is not all that high coming in
around 38.6% as of q3 2021. Now this is where the picture gets a little bit more complicated
net income is actually down slightly and free cash flows only up a little bit the reason is
that the company is aggressively reinvesting in itself and some people think part of this has to
do with appeasing the chinese government as well the company's balance sheet is in excellent shape
with more than $145 billion in cash and only $21 billion in long-term debt and the company's
returns on capital are solid but not super strong his net income is not growing as fast as revenue
alibaba was founded by 12 people the most famous of which is jack ma who is unfortunately no longer
involved with the day-to-day operations of this business in his place as ceo daniel zang and it's
worth noting that zang was part of that original 12-member team that founded alibaba glassdoor.com
probably isn't a reliable source to gauge employee sentiment however those numbers actually look
pretty good and with such a huge founding team we were hoping that insider ownership would be
larger but it's worth pointing out two things one at two point three percent that is still an eight
billion dollar level of skin in the game and two jack ma though not still involved with the company
owns roughly five percent of shares outstanding alibaba has a history of launching new products
and new services that open up new revenue opportunities we think this company has an
extreme amount of optionality built into it and clearly alibaba has reached the point where they
have operating leverage we're unsure of how much operating leverage is left they are investing in
their self now but we think that they might need to continue to do that as well take this number
with an enormous grain of salt however a third party believes that alibaba's total adjustable
market opportunity exceeds $24 trillion by 2027 of which it's only captured a very small part
and much of the company's growth is organic there are small acquisitions that are made but the bulk
of this comes from chinese e-commerce as of this time of this recording alibaba stock has been
a disappointing investment it has underperformed the S&P 500 since ipo and over the last five years
and while the company is not paying a dividend or paying down debt it's worth noting that they are
buying back shares of their stock turning to risks we think that alibaba faces a medium amount of
competition two notable competitors are jd.com and tencent it's also worth noting that this company
can be difficult to understand for two reasons one because it's located in china but two because
there are so many different businesses within the alibaba umbrella another major risk is just
politics this company operates out of china and it's huge which means that government involvement
is going to be a huge risk for investors to watch permanently and finally this is actually
a tech stock that has a relatively low valuation shares trade for less than three times sales and
more impressively less than 15 times trailing free cash flow so what do investors need to watch
moving forward number one watch the company's relationship with the chinese government number
two look for growth outside of chinese e-commerce again the two that we were most excited about was
their move internationally and cloud computing third keep an eye on the bottom line we want to
see the company's investment phase pull back and for profits to grow faster than revenue moving
forward so had this company score in our investing checklists for me the company only got a 66. while
I am very attracted to the business there's no doubt that this company has geopolitical risk that
bias has scored downward on my checklist and my score of an eight and a half was actually
two points lower than the ten and a half it got when i ran it through the screener the reason i
always take two points off when a company has the risk of being in china overall both brian
and i are highly impressed by the company's business and it's just a matter of whether
or not you're comfortable with taking on the geopolitical risk of investing in china if you
want to see our hour-long deep dive into Alibaba click the link you see on your screen brian's out