Jack Ma’s $100 Billion Outburst, Maybe, A $200 Billion Mistake
It’s a custom on the stage, in all good murderous melodramas, to present the tragic and the comic scenes in a regular alteration as the layers in red and white in a side of streaky bacon.
First, Alibaba’s BABA short, unhappy stock history. It peaked past October at $319. Since then, its free-fall put it back to where it traded three years ago. Alibaba has shed 30%, some $200 billion in market value and ticks at $219.
Even after its nose-dive, BABA is ahead 200% past five years. Such performance ranks it in a class with Facebook and Alphabet. Microsoft MSFT and Amazon AMZN far outstrip it but Nasdaq 100 Index trails. I deplore selling big winners and racking up capital gains taxes, but I halved my BABA. It wasn’t easy selling Xerox XRX and Polaroid 50 years ago, but their fundamentals rapidly deteriorated.
Shareholder equity looks around $143 billion so Alibaba is trading over 2.5 times book value, a not-excessive valuation in normal times. Additionally, BABA’s balance sheet is conservatively clean. There’s more cash than total debt plus preferred stock, some $60 billion.
Alibaba can weather the coming regulators’ storm, but there’s no way of assessing as yet what operating restrictions are coming. Certainly, no growth in fiscal 2021. Not only will Ant Group’s personal loan business be impacted but the core-merchandising sector no longer can retain exclusivity with merchant users on BABA’s network.
Lemme deal with operating numbers before regulators swing their hatchet. Alibaba’s current stock price, low two-hundreds, is down from low three-hundreds. I saw $10 a share in non-GAAP diluted earnings per share and potential for $30 billion in adjusted yearly Ebitda. Latest quarter’s operating income grew 44% to $4.4 billion.
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Shorthand, put a 20 multiplier on $20 billion in operating income, pre-regulation. After working through page upon page of quarterlies and semiannual-financial tables, I’ll deal with annualized numbers that I believe management was poised to report for their fiscal year ending in March before regulators stepped in.
Clearly, the Chinese regulators are totally pissed with Jack Ma. They could easily dismember Alibaba. First, the personal loan business won’t be allowed to make loans without substantive borrower collateral. The other major component of Ant Group, money management, could see some tightening but is unlikely to be torn apart.
My original investment interest in Alibaba was conceptually-based, that Ant could grow into the largest money-market operator in the world. Once the flattened yield curve lifted, profit margins would snap back. Additionally, Ant would build-out its asset-management base in equities and bond funds, inclusive of high-yield constructs.
Why couldn’t Ant copy the footprint of a Fidelity, amassing trillions in fee-based managed assets? U.S. asset-management properties sell at high price-earnings ratios, easily over 20 times earnings. Even the wealth-management arms of our major banks, like JPMorgan Chase JPM and Citigroup C hold trillions in fee-based assets despite mediocre performance over recent years. Normally, this is a steady, growable earnings base.
Alibaba is worth $400 billion. But, what is its operating world likely to look like? Who knows? Nobody knows. First, I’d bring its multiplier of earnings down from over 20 to no higher than 15. This even may be too generous. After all, when banks get in trouble they trade down to 10 times earnings, below book value and yield over 5%. Alibaba has no yield protection, zero, and trades over 15 times normalized earnings.
As for Jack Ma’s hubris? It’ll getcha time and again. I halved my BABA position and bought more General Electric GE . After all, Jack Welch’s hubris on leveraging GE’s balance sheet with iffy acquisitions has long played out in the balance sheet and income statement.
Ma’s poke-in-the-eye of regulators is soon to play out in its income statement. As a prized and widely-heralded underwriting, Ant Group is now yesterday’s fish. It’s actual solicitation of online small loan-borrowers, uncollateralized, is due for some curtailment. Near term, there’s no way to model Ant’s income statement. Long term, I believe Ant will build out its money management services and reach a multi trillion-dollar asset base. I’d put a 20 P/E ratio on this business. Ant could be worth much more than Alibaba’s merchandising business, say three to five years out.
Ma’s outcry at his regulators reminds me of Saul Steinberg, still in his twenties, making an unsolicited bid for Chemical Bank, in the sixties. Regulators told Saul to get lost, his leveraged buyout construct was unheard of for a bank and totally unacceptable. Twenty-five years later, bank loan syndicates formed by investment bankers, furthered scores of LBOs. Banks loved the standby fees of 1%. I borrowed $1 billion in a 15-minute presentation.
Jack Ma berated his Chinese regulators for their pawnshop mentality on his small loan book of business, mainly unsecured credit availability. This outburst has turned out to be a $100 billion – $200 billion mistake of commission. Headmen are supposed to be softer spoken.
I abhor foreign-based investments. First, there’s the currency risk, then accounting conventions aren’t as strict as ours. Financial reports can be sketchy. In Alibaba’s case, its financials are impeccably complete but contain no forecasting insights. You’re on your own. This is typical for all e-commerce and internet properties starting with Apple AAPL and working your way down to Alphabet, Facebook and Amazon. The sole tech financial report that I feel comfortable with is Microsoft, where I’m double-weighted therein.
As for the market, the new year is unlikely to be a great vintage. Nobody wants to deal with its elevated level. I’d put it over 20 times my prospective earnings projection of between $160 and $180 per share. Lest we forget, the market rose 70% from its March low point, but just 15% from yearend 2019.
Alibaba belongs in the high-flyer category. Big premium over book value, still elevated price-earnings ratio and near-zero earnings visibility. Meantime, Facebook sells at seven times book value and Amazon’s earnings are pure conjecture.
The market ain’t stupid. This past year, tech became pricey so the money flow moved to the darkest-before-dawn paper. Can Macy’s M mount another Christmas parade down Central Park West? Will U.S. Steel’s balance sheet be tested and what price for oil, copper, steel and aluminum? Can Citigroup’s net interest margins elevate much and what about General Electric’s regaining a following? I’m a player.
Past year, $5 paper doubled and tripled, like General Electric, Halliburton, U.S. Steel, Freeport-McMoRan and Macy’s. I feel much more comfortable with such ragamuffins than with Jack Ma’s Alibaba. After all, I can easily creep into the head of our Federal Reserve Board chairman on upcoming policy initiatives, but I’m out of my element in the China game.
The Street’s curiously silent on Alibaba, still a sizable-market capitalization property, but sadly unanalyzable.
Sosnoff and/or his managed accounts own Alibaba, Facebook, Amazon, Citigroup, General Electric, Microsoft, Macy’s, U.S. Steel debentures, Halliburton and Freeport-McMoRan.