When you buy Alibaba shares you are making a number of bets simultaneously. Here are my thoughts on some of them.
1. You are betting on China. Jack Ma talked about growth prospects in US and Europe but this is a dominant Chinese company (80% market share) whose future will depend on its continued success in China.
This is a good bet. China is growing slower today (7%) than some would like but it will continue to grow at rates that are multiples of US/EU/Japan growth rates.
2. You are betting on the growth of internet and e-commerce penetration in China.
This is a good bet. As McKinsey has pointed out, China’s population is still migrating from rural to urban areas. Technology is growing faster than GDP. Customers increasingly have the means to buy and pay for products online (debit/credit cards). There is a big opportunity for Alibaba’s financing products to benefit from this. There are the beginnings of consumer-level data bases that will allow lenders to better assess credit risks. All this means growth.
3. You are betting on the growth of China’s middle class.
this is a good bet. Alibaba’s customers are young, educated, middle class. The creation of a large and robust middle class is the bet most foreign firms are making when they invest in China. Urban incomes are growing 8-10% per year (7% real, 3% wage increases). Very solid bet.
4. Added together, these imply that the sector and Alibaba should grow significantly faster than China’s nominal GDP growth of 10% per year.
5. You are betting on market share, that competitors (TenCent) do not take Alibaba’s customers away.
At 80% share, this is a risk. But companies with 80% market share have a lot of market power and benefit from network effects.
6. You are betting that there will not be surprise legal/regulatory actions in China.
I don’t know how to assess this bet. (but companies in China don’t get this big without friends/protectors in high places)
7. You are betting on the China stock market.
This is not a good bet. Today’s IPO was in New York but Alibaba will still rise and fall with the Chinese stock market, which does not have a history of rewarding investors when companies grow.
8. You are betting on key man risk in Jack Ma. I met Jack years ago when he was just getting Alibaba going. He is a man of extraordinary energy that can captivate an audience (including me.)
This is not a good bet. Jack is very important for this company. This risk can be overcome over time if he will allow that to happen (as Steve Jobs did at Apple) but until then a health event for Jack would be a major deal for the stock.
9. You are betting on the quality, predictability, and transparency of Chinese legal and financial institutions.
This is not a good bet. The things US investors take for granted are not yet in place. Basic property rights, rule of law, courts, judges, IP protections, securities laws (insider trading, front running, …), financial statements, audits, corrupt local officials are all issues. These will get better over time but are risk factors today.
10. But the biggest bet that an investor is making when owning Alibaba is your own ability to fully understand the bet. That is less of a statement about Alibaba than it is a statement about the lack of hands-on experience in China.
My basis rule is that an investor should only own things they can understand. ( I learned this rule by losing money every time I don’t follow it). No matter how intriguing a story is, you should stay away from it if you don’t understand it.
I have substantial experience in China.
I don’t understand this one well enough to make the bet.
John
