InvestorPlace’s Vince Martin recently commented that Alibaba Group (NYSE:BABA) has returned to its rangebound ways, an indication that owning Alibaba stock might not be the best idea in the immediate future.
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“Investors who have long waited for Alibaba stock to finally rally again might hope that history will repeat. The problem at the moment is that…it’s not at all clear why or how that can happen,” Martin wrote in an article published on Oct, 15.
Martin believes that Alibaba stock has been unable to provide investors with a legitimate buying catalyst, and until it does, BABA stock is dead money.
That’s a perfectly reasonable assessment of Alibaba’s current situation. However, I look at the e-commerce giant from a slightly different angle.
A Lot Like Buffett
For me, Alibaba resembles a company like Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), which has a lot of moving parts, making it very difficult for investors to value the entire business.
Sure, you can break down Alibaba Group by operating business and assign a value to each of them in a sum-of-the-parts exercise. That’s often done with Buffett’s company, but it’s really just modeling.
There is no way to be 100% sure what the actual intrinsic value of Alibaba Group is. That being said, I do believe that if the company was broken into its various pieces and then each of those pieces was sold to the highest bidder, the total would be more than $459 billion, the current market cap of BABA stock.
There’s no way to know that for sure.
But my view of Berkshire stock in the past has been similar to my opinion of BABA stock now. In April 2017, I recommended buying Berkshire, suggesting it was one of nine stocks to put in a drawer for the next decade.
“Berkshire Hathaway owns hundreds of businesses; each of these firms, if sold at auction, would be worth more than the current stock price would seem to reflect,” I wrote.
Since my recommendation, BRK.B stock has appreciated by 30%, a decent, if not a spectacular return on investment. During that period, it, too, has been largely rangebound, struggling to stay above $200. On six occasions since April 2017, Berkshire stock has moved above $200, only to fall below this level every time, usually within weeks.
Yet I wouldn’t suggest selling Berkshire because there could come a day when it’s broken into pieces. When that happens, investors will be grateful that they owned the shares.
I get the sense that Alibaba stock could be on the same path to greatness.
Valuing Alibaba Stock
Seeking Alpha contributor Terracotta Investments recently examined the new growth drivers for Alibaba: Product or service innovation, penetration of the lower-tier cities in China, and overseas expansion.
The author broke down Alibaba’s core business into eight different segments, including Retail, Wholesale, New Retail, Cainiao, Consumer Services, International, Youku, and Cloud & Others. The value he places on these businesses at the midpoint between best-case and worst-case scenario ranges from $231 billion for its retail business to a low of $3.3 billion for Cainiao, its global parcel tracking platform.
Added together, the author comes up with a mid-point valuation of $171 a share for Alibaba stock, or slightly below where it currently trades. But that doesn’t take into account its various investments in other businesses. Its largest such investment, worth almost $50 billion, is in Ant Financial, the digital-payment business.
Together, these investments add $32 per share of value, bringing the total value of Alibaba stock to $210. After subtracting 5% for a conglomerate discount, the fair value of BABA stock comes to $200 a share.
So based on the author’s estimates, BABA stock is trading about 18% below its fair value.
However, intrinsic value calculations shouldn’t be relied upon when deciding which stocks to buy.
My view is that the best stocks to own for the long haul are companies with business models that make sense, generate tremendous free cash flow, and, as the Seeking Alpha author suggested, are always focused on driving growth.
Even though Alibaba stock has, much like Berkshire, been rangebound for the better part of two years, I still think it’s a buy.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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