I have an innate distrust of international companies, and of Chinese companies in particular. There have just been so many Chinese companies that have been the subject of fraud.
In addition, knowing individuals who work in China and tell me that corruption is rampant, I have very little inclination to invest.
Still, it is difficult to ignore Alibaba Group Holding Ltd (NYSE:BABA). Alibaba stock has done extremely well for investors, but is BABA the real deal, or is it all hype?
What we do know is that Alibaba represents this massive entity across multiple platforms that ships gargantuan amounts of product ordered from its websites all over China. It is apparently the world’s largest retailer at this point. That alone should generate plenty of interest in Alibaba stock.
It seems to have a lock on the middle class, and even if economic growth slows from the rapid pace China has experienced, the fact that BABA is so dominant as a retailer should give it legs.
Alibaba Stock Growing Into the Future
BABA has multiple investments in many other ventures, not unlike its American counterpart, Amazon.com, Inc. (NASDAQ:AMZN). The payoff of some of those investments remains to be seen, so trying to value those seems difficult.
Others are already paying off. For instance, like Amazon, BABA launched a cloud computing platform and saw revenue increase over 150% year over year. BABA is also getting into the content production game, which could go either way.
Unlike Amazon, however, BABA stock actually makes ongoing operating profit. Jeff Bezos seems content to just do his thing, profit be damned. Thus, we can peg BABA as a more traditional growth stock.
For the fiscal year ending March 31, Alibaba stock delivered revenue growth of about 28% to $15.6 billion. Operating income increased 20% to $4.5 billion.
There are some confusing one-time events and minority interest to account for, so it trades at 52x operating income. By comparison, Wal-Mart Stores, Inc. (NYSE:WMT) trades at 15x. So, like other internet companies, it’s difficult to value on a traditional basis — which I frankly do not like.
Alibaba stock generated $7 billion in free cash flow, not too different from Amazon, which had $7.4 billion. BABA stock has about $18 billion in cash and short-term investments, offset by about $8 billion in debt. So on that basis, BABA’s financials are in good shape.
Yet there is a big overhang that concerns me, and I mentioned it up top — I’m concerned about things at Alibaba not being above board.
The SEC is investigating the company’s accounting practices. The problem with BABA stock is that it has so many affiliated entities, and so many different types of businesses, and that Chinese companies can be so opaque, that it creates a terrible cloud of uncertainty around the stock.
It leaves me to ask if, despite its retailing position, I really want to get involved with a stock that may have huge upside but could crater on a moment’s notice. This is my problem with momentum and growth stocks in general. I personally prefer stocks where there is minimal opportunity for unknown variables to wipe out my investment.
And there are other growth plays out there with less uncertainty, real earnings and no SEC investigations.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
