Michael Burry’s increased investments in Alibaba and JD.com highlight optimism in undervalued Chinese equities despite significant risks, suggesting potential opportunities for value-focused investors.
- Michael Burry’s Scion Asset Management significantly increased investments in Alibaba and JD.com, indicating optimism about Chinese equities despite inherent risks.
- Alibaba’s valuation remains attractive compared to Amazon’s, and it trades at significantly lower multiples despite strong cash flow and dominant market positions in e-commerce, logistics, and cloud services.
- Investors should be cautious. They should recognize the potential value in Alibaba and JD.com but also consider the specific risks and uncertainties associated with the Chinese market and economy.
Michael “Big Short” Burry’s Scion Asset Management’s first-quarter 13F filing highlights investors’ optimism about Chinese equities. During the first quarter, Burry increased his investments in Alibaba (BABA) and JD.com (JD).
Previously, Burry held long positions in Chinese equities, with approximately 6% in JD and 6% in Alibaba. He has increased his exposure to 9.5% and 8.7%, respectively.
Relying solely on the investment choices of prominent investors can be risky, as their goals and timelines may need to align with yours. However, examining the rationale behind their decisions can be enlightening.
Alibaba Stock Vs. Amazon Stock
One of the main attractions of Alibaba and other Chinese companies is its price (valuation), even after the recent rally. A few years ago, companies like Alibaba were valued much higher than today. This becomes evident when comparing Alibaba’s market capitalization to Amazon’s (AMZN) over time, as shown in the chart below.
While comparing these e-commerce giants requires caution due to their similarities and differences — including their core e-commerce and logistics operations and involvement in cloud computing — it is noteworthy that a significant portion of Alibaba’s revenue comes from Taobao and Tmall, China’s leading online shopping platforms. Other vital segments include the Cloud Intelligence Group and Cainiao Smart Logistics.
Moreover, unlike Amazon, Alibaba is headquartered in China, making its performance highly dependent on the Chinese economy and subject to country-specific risks (such as delisting, exchange rates, etc.).
Is BABA Still worth it?
Alibaba’s valuation is significantly lower than that of Amazon. Despite solid cash flow metrics, Alibaba’s stock performance has lagged, leading to substantial reductions in metrics like EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization).
Amazon trades at an EV/EBITDA of approximately 18.2x, which is reasonable given its strong competitive advantage and growth potential. In contrast, Alibaba’s EV/EBITDA stands around 7.5x. Over the next 12 months, Alibaba’s multiple is expected to drop to 6.9x, while Amazon’s is projected to fall to 14.2x.
Notably, there remains a gap between the two Chinese giants and Amazon, though this gap has narrowed considerably. Even with this narrowing, multiples close to 7x (EBITDA/cash flow) remain very attractive for companies with significant moats in Asia and dominant positions in e-commerce, logistics, and cloud services (which should benefit from AI).
The differences in valuation are understandable when considering the unique risks Chinese companies face, including growth, competition, and institutional concerns. However, it is noteworthy that Alibaba, once traded at the same level as Amazon, now trades at less than half of Amazon’s multiple (as of mid-2020, for example), making it an attractive prospect for value investors.
There has been a substantial shift in the global macroeconomic narrative in recent years, particularly regarding China. The market has become more cautious about China’s economic and geopolitical outlook. In addition to weaker growth prospects and uncertainties about government incentives for consumption, there are also issues, such as U.S. tariffs on Chinese goods.
That said, Alibaba could still represent a “value trap,” remaining cheap for longer. Just as the premium on Amazon’s stock is justified, so is the discount on Alibaba, suggesting that investors should proceed cautiously and ensure proper asset allocation.
Should You Follow Burry’s Bet on Alibaba and JD?
Investing solely based on another investor’s actions can be risky. However, observing and understanding other investors’ strategies can inform your decisions and align them with your objectives and risk tolerance.
As highlighted, Alibaba’s shares are significantly undervalued. Due to concerns about macroeconomic conditions, competition, and other risks, Alibaba trades at approximately 10x its FCF and even cheaper EBITDA multiples.
On the other hand, although more expensive, Amazon does not appear overvalued given its substantial growth opportunities, which are more precise and more plausible than Alibaba’s (with fewer risks and uncertainties). These opportunities include optimizing cash flow relative to capital expenditures and leveraging efficiencies in AI, cloud computing, and related sectors.
The conclusion is that Chinese companies indeed present an attractive valuation, but with the recent rally, caution is warranted. From my standpoint, I still favor allocating some investment in Alibaba, not only to gain exposure to potential long-term recovery in the Chinese economy but also to invest in a company with solid moats, strong cash generation, and significant diversification, which could deliver medium-term gains through efficiency improvements and growth across various avenues.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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