Alibaba And The 40 Days!
Headwinds are changing into tailwinds for Alibaba (BABA). Time to sail this ship to profit land!
- The supply chain disruptions, shipping congestion, and rising shipping costs that have negatively affected the company in the last 24 months are coming back to pre-pandemic levels.
- International markets are an important growth opportunity. With the shipping, problems resolved the international growth story can resume.
- The company has grown its revenue by more than 16X since the 2014 IPO but is currently trading near the 2014 price range, making it an attractive value play.
- Cloud and A.I. — Alibaba is one of the few global companies that are sitting on a rich bed of data that will benefit the company in the long run.
Thesis
Beaten-up Alibaba Group (BABA) stock looks to quickly recover from what were temporary headwinds like supply chain disruptions, shipping costs, and bottlenecks. Small businesses could not afford the astronomical increase in shipping costs so they slowed down ordering goods via Alibaba in 2021–22. Shipping costs and delays were a significant headwind for BABA stock, as an increasingly important portion of their customer base was priced out. Now that these global shipping and supply chain issues are almost fully behind us, we see a rebound in BABA stock as the company returns to tech stock growth trends.
Headwinds
We want to encourage our readers looking at BABA shares and the potential value they represent to fully understand why the company is currently so undervalued and to pay attention to a few key indicators for the signs of a turnaround in the macro environment causing the bloodletting in BABA share price before adding to or starting a position.
Ukraine
War in Ukraine has decreased global trade and increased the cost of fuel, and both of these consequences will continue to add drag on Alibaba, but if and when there is a peaceful resolution, we can expect an additional tailwind to help Alibaba.
China Macro
Most Chinese companies are facing a slowdown in their revenue due to a weak macroeconomic outlook and the possible housing bubble collapse in China. Both government and private-sector data indicate that Chinese consumers have had a tough time.
US and China regulations
Additionally, the tech sector faces anti-monopoly regulations in China, as well as accounting and auditing regulations in the U.S.A. The Chinese tech sector has been battered by a regulatory crackdown by Beijing, which helped Alibaba drawdown more than 50% of its market value in a course of a year. All this on top of a slew of negative news about the delisting of the ADR shares on the U.S. exchanges due to non-compliance, has cratered China’s tech sector over the last 24 months.
However, China does seem to have shifted its tone regarding tech and regulations lately. Although uncertainties remain, the recent easing of the tech crackdown has given a positive signal to the Chinese market and Alibaba (which at times has been the focal point of government scrutiny). We will have to wait and see if it is only lip service or if they are truly going to relax the overly tight grip that has been strangling the industry in the last two years.
The Journey to 40 Days
Shipping Delays
One of the main indexes we are paying attention to is the “Flexport’s Ocean Timeliness Indicator, (OTI) ” which measures the amount of time it takes to ship freight from the point at which cargo is ready to leave the exporter to when it is collected from its destination port. As we can see from the chart below, the delays were hitting record numbers in 2022. Measures are shown for Far East Westbound (e.g., China-to-Europe) and Transpacific Eastbound (e.g., China-to-US) routes.
Shipping delays (flexport.com)
According to Flexport research: The TPEB above, remained flat at 69 days, the fastest time since early January 2021. FEWB meanwhile decreased to 74 days from 75 days, close to the average level since January 2021. This improvement shows that supply chain issues are being resolved at a steady pace. The indicator may also be showing that the worst of the shipping congestion is behind us.
We are looking for the OTI index to enter the red circle on the chart above and the trend toward 40 days. Anything below 70 is a positive signal and, the closer to 40 the better. At or near 40 days for ocean delivery, puts us at where we were during the pre-pandemic levels. It is possible that the delivery times can go below 40 days as many ports have invested heavily in technology to improve the historic congestion, which could have positive lasting effects on trade, as well as on BABA revenue.
Shipping Costs
The ocean shipping costs were rising at a historic pace as cargo owners had bid up rates in a search for ocean transportation capacity. The average price worldwide to ship a 40-foot container had gone up more than quadrupled from the year’s prior average to ~$8K according to a global pricing index by London-based Drewry Shipping Consultants Ltd. Listed prices to ship from China to major ports in Europe and the U.S. West Coast was as much as ~$12K a container.
The prices have come down ~66% from the highs as we can see in the chart below. If the downward trend continues, we can be even more optimistic about BABA share price recovery.
In the chart below we can see the drastic price drop in this year's shipping costs vs the prior year.
Since shipping costs have come back down to near pre-pandemic prices, we can see a pickup in demand for ordering goods via Alibaba. Before the prices came down, it was only the big and established companies had the relationships and the resources to negotiate with the shipping companies.
Before this spike in cost during 2021–2022, anyone could take a trip to China or electronically negotiate with a manufacturer over Alibaba to order a shipment of goods to have them shipped to their county, where they can re-sell and mark up for a profit. The margin for smaller importers was destroyed by the cost of freight and delays.
Prior to the shipping cost explosion, a person could have pooled a relatively small amount of capital and placed an order on Alibaba.com or AliExpress, and if correctly executed would start a small online business. As the small business grew, it would inevitably increase the number of goods purchased, and both the small business, the manufacturer, and Alibaba would benefit. The virtuous business cycle had been ground to a halt due to skyrocketing cost of shipping and delays, but now the tailwinds are blowing again in the right direction and we are willing to sail the BABA ship back to all-time highs, ATH.
Growth
In 2021–22 Alibaba’s growth trajectory had temporarily stalled because of the shipping reasons previously discussed. If we look at the numbers Alibaba has saturated the domestic markets with 953Mn domestic consumers which is more or less every single adult in China.
alibabagroup.com
The Chinese economy is slowing down as well. In an unfavorable macro environment and without much room left to grow domestically. Alibaba’s clear path to growth is to look internationally for opportunities.
Optimizing in China and Growing Internationally
Alibaba has decided to waive fees for merchants to increase retention on their platforms. Alibaba is giving up short-term revenue gains for longer-term stability and future growth, as it has done many times before much to shareholders' dislike only to be proven as a correct move long term.
Domestic markets are fully saturated in China, and Alibaba is now switching from a domestic growth to a retention strategy while shifting its focus to greener international pastures.
Alibaba's stock price has gone back to where it was in 2014.
The company has grown its revenue by more than 16X since the 2014 IPO from 52,504 million yuan to 853,062 million yuan, which is making it an attractive entry point for investors looking for value.
The rest of the world has plenty of room to grow. Given the shipping hurdles discussed in the prior section, the international growth story had to wait for the shipping duration metric to head towards 40 days and the costs closer to $2k per container before it could have started materially adding to BABA’s bottom line.
alibabagroup.com
Cloud Computing
alibabagroup.com
Luckily, Alibaba had several products and services that made it a resilient business even in these tough pandemic times.
- Domestic and international commerce
- Local Consumer Services
- Digital Media and Entertainment
- Logistics
- Cloud
Much like Amazon, Alibaba is more than the single business it is best known for. The product/service we are very excited about from BABA is machine learning / A.I.
BABA is sitting on a large well of data and in the new digital age data is the new oil.
Cloud is the second-largest source of revenue at 9% of total revenues. Alibaba Cloud is the largest cloud computing player in China. Alibaba will likely remain the leader in a fast-growing cloud market in China and continue to look to international markets for growth.
Kai-Fu Lee, an A.I. scientist and author of “A.I. Super-Powers China, Silicon Valley, and the New World Order” believes that machine learning and A.I. is a quantity of data game and that once a company gets ahead with a large set of data, it allows them to make amazing leaps against its competition. The first-mover advantage then results in more users and even more data with a winner take all or most outcome. Lee names Alibaba as one of the likely take-all winners in the A.I. race.
Alibaba generates a well of data via its other services, that feed into its A.I. models to improve the source service as well as the A.I. models. We believe that his virtuous cycle will pay off in the long run and is already showing signs of being a massive revenue generator for the company.
Risks
We are not going to sugarcoat it, there are a lot of risks associated with buying any Chinese ADR, especially in tech. And the transportation of goods from China to Europe and the US is still very much a risky enterprise given the geopolitical tensions. We urge our readers to take caution if choosing to acquire BABA shares at these attractive valuations by knowing the risks and staying vigilant on regulatory news as well as the Flexport indicators trends.
Final words
The Flexport indicator has started heading towards 40 days (a more normal amount of time), we can expect the supply chain issues to ease further and the resulting inflation to ease as well. We have been waiting since June 2022 to add to our Alibaba position. We wanted clear confirmation that the shipping duration was headed closer to 40 days and the shipping container costs were getting closers to $2000. Now that both of those indicators are closer to our target we are happy with the risk-reward profile and willing to add BABA shares to our portfolio.
