What Is Working for Daniel Loeb: Alibaba

GuruFocus.com
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- By Holly LaFon

Daniel Loeb (Trades, Portfolio) is a market-beating hedge fund manager who employs event-driven value investing, which has worked well for him. He has almost doubled the return of the S&P 500, posting 15.9% annualized versus 8.2% for the index. Year to date, he has just trailed the hot market, with an 18.1% gain compared to a 20.5% rise for the index.


One of the investments propelling those returns is his fund"s bet on Alibaba (BABA). Loeb"s Third Point has a 6.6 billion-share position in Alibaba built up since the second quarter, ranking it as his second-largest holding. His hedge fund, Third Point, also has the second biggest portion of its portfolio allotted to the stock, spanning roughly 9.6% of the long shares listed.

Alibaba, the gargantuan online retailer from China, has so far gifted Loeb with substantial profit. With buy prices averaging $123 in the second quarter and $162 in the third, he has watched the stock reach $175.50 as of Wednesday afternoon, for an estimated 30% gain. Entering slightly earlier would have captured bigger returns, as the stock has soared 99% year to date.

Loeb commented on initiating the position in his second quarter letter.

"Alibaba is currently at a positive inflection point after rolling out significant changes over the past year to its advertising platform, which currently generates the majority of the company"s revenue," Loeb said. "We view these changes as an important catalyst for meaningful revenue acceleration over the next few years."

Loeb added, "Combined with an attractive multiple, we believe now is the time to own Alibaba again."

Some of Alibaba"s valuation numbers indicate that it may also have a leg up on its U.S. competitor, Amazon (AMZN), which many value investors have avoided, and have more room to run.

According to GuruFocus data, Alibaba has a financial strength rating of 7 out of 10 compared to 6 out of 10 for Amazon. Likewise, it beats on profitability with a ranking of 9 out of 10 versus 7 out of 10 for Amazon.

The most striking disparity in the two online giants lies in their price-earnings (P/E) ratios. Amazon"s stunning 295.7 P/E overshadows Alibaba"s 26.5. Further, Amazon trades for 22.8 times its book value, while Alibaba is at 9.2 times.

The two switch places when it comes to price-sales ratios, however. Alibaba trades with a P/S of 15.6, near a two-year high, next to Amazon"s mere 3.6, which is near a 10-year high.

Last Alibaba beats Amazon on keeping its debt in check. Alibaba"s cash-debt ratio stands at 1.8, meaning it has far more cash on hand than debt. Amazon could still almost pay off its debt with its cash-debt ratio of 0.98.

Loeb had more to say in his valuation of Alibaba in his second quarter letter:


"Alibaba trades at 18x P/E on our calendar 2019 estimate for non-GAAP EPS. If we exclude the value of Alibaba"s expected net cash at year-end 2017 ($7 per share), its stake in Ant Financial at the latest private valuation ($8 per share) and our current estimate for the value of its Aliyun cloud business ($16 per share), we estimate that Alibaba"s core business is currently valued at $121 per share, or 15x our calendar 2019 EPS estimate of $8.20, while growing earnings in excess of 30% year-on-year."



See Daniel Loeb (Trades, Portfolio)"s portfolio here.

This article first appeared on GuruFocus.


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