Investment idea — Vol. 4, No. 11

The market has overestimated the size and likelihood of the problems the firm faces and, as a result, the stock is mispriced

Summary

Recommendation: Buy Alibaba (NYSE: BABA) American depository receipts at $86.

Thesis: The market has overestimated the size and likelihood of the problems the firm faces and has mispriced the stock as a result.

Catalysts: The firm will release solid first-quarter earnings in August and continue to repurchase a record amount of stock. On top of that, China’s economy will continue to grow, allaying investors’ fears of a collapse.

Valuation: Intrinsic value is closer to $110–125 per share, with a 40% upside.

Risks: Shareholders could end up with nothing if the Chinese government forcibly nationalises Alibaba or forces its sale. However, this scenario is highly unlikely. Instead, if Alibaba has further regulatory problems and shoppers abandon them for their competitors, the shares would fall to $68 each for a 21% loss.

Company background

Industry: Consumer discretionary; Broadline retail

Description: Alibaba is a Chinese company that runs online marketplaces. The company makes money by ch…