In mid-2020, A16Z wrote about why entry multiples don’t matter for VC/tech investments. I totally agree for VC firms like theirs, who have the capacity to invest in assets which are the very earliest points of commercialization…. multiples probably do not matter.
However, when companies mature, I do feel that multiples matter. That is not to say, all public tech stocks are governed by multiples, but multiples are important if you are investing in companies that are no longer in that start-up phase. Primarily the question you need to ask yourself is;
Is the multiple I am paying today lower than historical levels. If yes... has the market got growth assumptions wrong or have I?
So, if we are looking at multiples… Alibaba must be cheap right?
Currently, Amazon is trading on a trailing EV/EBITDA multiple of 27x and Alibaba is trading on 14x. This in isolation does not mean either is cheap or expensive, however, it does mean that the market generally assumes Alibaba is going to grow at a slower rate than Amazon.
Let’s unpack what has been happening with Alibaba (I am going to assume you have heard of China's biggest eCommerce platform)
Size of their business today: Alibaba has 1.3bn customers (1bn in China, 0.26bn elsewhere) through various brands. AliCloud (cloud computing) and other investments (e.g. Ant Financial) is also an increasingly important part of their business
Alibaba are somewhat invested in competitors too: Whilst founder Jack Ma ran Alibaba they invested in +100 projects beyond the core eCommerce platform (even if they were initially unprofitable). The most notable was Ant Financial (this prospective IPO is debated below)
Current management needed a shaken up: There has been a major management shake-up following sexual misconduct allegations. It is too early to tell if they have fixed cultural issues at the firm... however, it is a red flag
Ant Financials’ IPO of $35bn may still go ahead Alibaba’s 30% stake in Ant Financial (which failed to IPO in late 2020) is a material driver for Alibaba. One of the main reasons it was blocked by the government was its lack of credit checks. Interestingly, Alibaba has bolstered its credit checking software on its online shopping platform since this failed IPO.
Let’s not forget CCP has fined Alibaba +$2bn and the CCP have full capacity to continue issuing sanctions. Evidently, these fines were a way of CCP regaining control, however, the main reasons for these sanctions were:
Predatory pricing (or selling below costs)
A deemed lack of investment in China technology
Alibaba had accrued a large data set on its customers which the government saw as a threat
Lack of credit checks in Ant Financial
The CCP also made shipping more competitive: What is this “Choose One from Two” which Alibaba got in trouble for? Previously two competitive delivery firms would agree amongst themselves which firm would get which delivery orders (to make logistics less complicated). This collusion generally reduced competition in Alibaba's favour & it is a practice they can no longer engage in.
So tell me... is Alibaba a buy?
The short answer is, their situation is very complicated and it is confusing even the most experienced of fund managers (e.g. Semper Vic has written about this extensively).
What we do know is:
There is no way of predicting the pace at which the CCP can crackdown on tech in China
Alibaba’s management is going through a shake-up, and it is too early to confirm whether they have addressed the cultural issues which come with any abuse claims
The CCP’s requirement to increase competition and mandate Alibaba invest more in Chinese tech will likely lower the returns of their eCommerce platform. However, the AliCloud and Ant Financial are very valuable platforms for the business
Competitors in grocery (Pinduoduo) and regional players will continue to chip away Alibaba so there is some validity to a lower multiple
In short – if you are willing to risk a regulatory minefield… yes it is cheap. I personally will sit on the sidelines, however, if there is favourable developments/clarity in any of the above 4 points of course the share price will soar.
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