Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Alibaba: What Do Top Investors Think Of This Fallen Technology Giant?

Alibaba Group Holding Ltd (NYSE:BABA) is the Chinese Google Inc (NASDAQ:GOOG) in many respects, in terms of how it operates. Both businesses bring in lots of cash, and both are natural monopolies fortified by strong network effects. Instead of buying back stock or paying a dividend, both use their cash flow to invest in other ventures or to buy stakes in startups. In this article, we explain why Alibaba’s stock has retraced so much, examine hedge fund sentiment towards the stock, and at the end, judge how Alibaba should be traded by investors.

Alibaba Group Holding Ltd (NYSE:BABA), Logo, group, sign, chinese, business, sign, symbol

Pieter Beens /

We mention the hedge fund activity concerning Alibaba Group Holding Ltd (NYSE:BABA) because following hedge funds can generate alpha. Our research shows that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012, and they managed to return 102% over the ensuing three-plus years and outperformed the S&P 500 Index by over 53 percentage points (see the details here).

Sometimes Alibaba Group Holding Ltd (NYSE:BABA)’s side ventures work out great. Many investors think Alipay is worth $50 billion or more. Alibaba’s buy-in of Kuaidi has also been terrific. Alibaba’s Kuaidi shares have more than doubled in value in a short period of time. Alibaba’s other buys might not be as great. Snapchat may or may not be worth the $15 billion valuation that Alibaba bestowed on the social media company when it bought its $200 million stake.

But questionable side investments are not why Alibaba shares are down by 34% this year. Alibaba shares are weak because even shares of great companies will fall if the broader macro economy weakens around it. Alphabet/Google fell from $348 a share in 2007 to $146 in 2009 because ad demand cratered during the financial crisis. Alibaba’s growth has also slowed because ad demand in China is softening. Analysts expect the company’s EPS growth to be 20-30% rather than the 35-40% previously forecast.

While there are many similarities between China’s current slowdown and the Great Recession of 2007 to 2009, there is one key difference. The biggest problem in the Great Recession was investors lost confidence and didn’t invest in anything because they didn’t really know whether their counter-parties would be around to complete the transactions. Because investors didn’t invest in anything, many people lost their jobs. Because many people lost their jobs, investors became less confident, and the cycle repeated. Fortunately, the U.S government had a solution, which was to offer direct and indirect assurances through bailouts and lower the yield of risky assets enough so that investors had no choice but to invest how they did before.

With China, the problem can’t be corrected by lowering the yield of assets or bailing out companies. The problem is more structural and will take longer to solve. China’s government is working on it, but the ‘sell first, ask questions later’ investors who sold Google during the Great Recession clearly aren’t patient enough to stick around.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.