Alibaba: “Monster in the Making”

10/08/2014 10:00 am EST

Focus: STOCKS

Keith Fitz-Gerald

Editor, High Velocity Profits and Total Wealth

Global guru Keith Fitz-Gerald thinks investors are underestimating the long-term value and potential of this recent Chinese IPO; the editor of Money Map Press also highlights two additional stocks that offer ‘back-door bets’ on this Asian Internet retailing giant.

Steven Halpern:  Joining us today is one of my favorite guests, Keith Fitz-Gerald, senior editor of Money Map Press, as well as the Strike Force newsletter. How are you doing, Keith?

Keith Fitz-Gerald:  I am doing very well.  It’s nice to be back, Steven, and thanks for having me.  

Steven Halpern:  You’ve long been known as an expert on global markets and have been particularly close to Asian markets, given that you live in Japan. You’ve been anticipating the IPO from Alibaba (BABA) for some time.  Could you give our listeners an overview of the company and a little about its background fundaments?

Keith Fitz-Gerald:  Absolutely.  Alibaba is not just a Chinese Internet company that’s going public.  This is a company that has the size, scope, and scale to be one of the Internet’s dominant players.  I think it changes the landscape for many investors and certainly for how investments get done.  

The company, if you think about it, potentially represents more Internet sales transaction volume than the United States, France, England, and Germany combined by 2020.  The sheer potential of this company is simply stupefying.  

In fact, it’s already bigger than Amazon (AMZN) and eBay (EBAY) combined so, in that sense, the company’s IPO is about the future and the internet as we know it, not just merely about Internet retail, as a lot of Westerners are thinking.

Steven Halpern:  Could you bring our listeners up to date on the firm’s US listing and IPO and your view of the stock’s value looking forward?

Keith Fitz-Gerald:  Absolutely.  The stock came out of the gate very strong with a vengeance.  It’s one of, I think, the world’s largest IPOs now.  It raised, I think, $22 to $25 billion.  The number keeps floating around a little bit, depending on stock valuation.  

It surged 38% after an unprecedented two-and-a-half hour delay needed to process the order book, which is the fullest order book, according to the market makers I talk to, that they’ve ever seen on an opening day.  

This resulted in a market cap of around $230 billion, which, if you want to put things in perspective, is bigger, Steven, than IBM (IBM), Procter & Gamble (PG), and General Electric (GE).  

The long-term thesis here is that this is a company with a sustainable business model, this is a company that has three years EPS growth of 118%, and it’s a company right now that is trading approximately 37 times forward earnings, which some people think is pretty full.

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But if you look at Amazon, which is trading at 168.56 times forward earnings, I think there’s a very different perspective here.  

The biggest mistake investors can make, in my mind, and it’s something that I’ve seen time and time again over the 30 years I’ve been doing business in Asia and in China, in particular, is that they try to put Western metrics on something where Western metrics don’t apply.  This is one of those cases.  

To give you an idea, again, Steven, China, we’re talking about 600 million Internet users now, 800 million by 2015 in China alone, some 70% of which are shopping or transacted via Alibaba or its online cousins.  This is an absolute monster in the making.

Steven Halpern:  The pullback that we’ve seen along with recent market weakness, you wouldn’t take that as a sign of caution but actually a better opportunity for a long-term investor to take a position.

Keith Fitz-Gerald:  Sure, if your time horizon and your risk tolerance is correct, if you believe in buy low and sell high like I do, big down days are a great chance to accumulate a position at a discount.  

I think that this is potentially going to be the world’s first trillion-dollar company a few years from now, and I think that the growth is simply outstanding when you look at the global potential that Jack Ma envisions.

Steven Halpern:  Now, I know you’ve benefited from the gains in Yahoo (YHOO) as it rose in anticipation of the Alibaba offering.  Could you explain how Yahoo fits into the situation and whether or not you would still consider buying that stock as well as Alibaba?

Keith Fitz-Gerald:  Well, sure.  We took Yahoo as a recommendation, and we recommended it to our subscribers really as a back door into the Alibaba IPO, knowing that Alibaba shares were going to be very hard to come by.  

I think Yahoo right now is a ‘do-or-die’ company.  The business really isn’t worth anything absent of Alibaba’s ownership position.  To be clear, Yahoo owns Alibaba shares.  I just don’t think the company stands a chance unless it can redefine itself.

That having been said, they are flush with cash by virtue of the Alibaba public offering, so if Yahoo spends it wisely, they may transition the company to something that ultimately stands on its own merits.  

If you look at recent news headlines, where Yahoo is talking about buying AOL, I can’t remember who said it, but this is like two career alcoholics trying to stand each other up at the end of the bar.  It’s not going to end well.  

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Steven Halpern:  Now, less well-known than Yahoo is another player in this story, SoftBank (SFTBY).  How is this company involved?

Keith Fitz-Gerald:  Well, SoftBank is a Japanese version.  They have done the same thing as Yahoo.  They bought into Alibaba in the early days and they expect to book some $500 million yen on Alibaba’s IPO.  

Chairman Masayoshi Son is a very, very vocal proponent of Alibaba, and that’s certainly understandable, because the little tiny stake that they put into Alibaba is now worth some $75 billion—so between the stimulus in Japan and the weakening yen—I think that SoftBank is a great buy.  

I think that they’re going to be actually the better player than Yahoo, but both of them have the same sort of concept.  They’re back doors into the Alibaba business model.

Steven Halpern:  Now, before we let you go, given that you’ve spent so much time over three decades on the ground in Asia, I was hoping you might comment on the current situation in Hong Kong and what impact that might have on investors looking at that region?

Keith Fitz-Gerald:  Hong Kong is like an onion, Steven.  There are many, many layers, some of which are political, some of which are economic, and some of which are financial.  

The irony here is that Hong Kongers like to believe the world revolves around them.  After a century of British rule, they perceive themselves as being morally, politically, and economically superior to the mainland bumpkins, which is how they view their mainland Chinese cousins.  

The reality of the situation is that Beijing took the reins in 1997.  They are not going to hand them back.  Beijing, if anything, has been very, very restrained in dealing with the protests underway now, but don’t make the mistake for a minute, as many Westerners are thinking right now, if the communist party believes it’s threatened, they will not hesitate to roll over the capitalist party taking place in Hong Kong.  

What that means, really, in plain English, is that Beijing has decided Shanghai’s financial markets are China’s future.  They’ve largely left Hong Kong alone, because it’s a source of foreign currency and capital, but that’s changing as Hong Kong’s markets get marginalized and Shanghai’s exchanges become much more modernized.  

If I were a betting man, I think a couple of years from now, Shanghai’s exchange is going to be one of the world’s largest, most sophisticated financial exchanges, and Hong Kong is going to be a speed bump in financial history.  

Steven Halpern:  Fascinating.  We appreciate you taking the time.  Thanks for joining us today.  

Keith Fitz-Gerald:  It’s my pleasure.  Thank you very much, Steven.  

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