June 17, 2022: -Investors may still be nervous regarding Chinese stocks despite massive failures that have compelled, but portfolio manager Sid Choraria told tech titan Alibaba is no “value trap.”
To classify Alibaba as one, investors would think that the e-commerce giant’s increase will be in the single digits, said Choraria of SC Asia.
A value trap is a stock appearing cheap as a low valuation measured by price-to-earnings ratios, reaching the current share price to the company’s earnings for each share. But these low-priced stocks could as “traps” for investors if the company is plagued by financial instability or sluggish growth.
Choraria said that Alibaba’s growth is healthy and in the double digits for its e-commerce and cloud-computing businesses.
“I mean, the cloud computing division is an $11 billion payment business that I wish will be $25 billion revenue in three years,” he told CNBC in a recent interview. “Digitalization is not going away in China, and that’s a significant part of development.”
“If Alibaba generates the type of cash it is, it’s not a value trap at these levels. Now, if it’s at low single digits, it will turn out to be a value trap,” he said.
He said that Alibaba is one of “less than ten companies globally” that develop $15 billion in free cash flow, the money a company has on hand after paying off its operating expenses and capital expenditure.
And for the increase to be less than that much from current levels, Choraria said the economy would have significantly to slow down. “As a fund manager, I’m betting on Alibaba,” he said.
“I such as the odds with Alibaba for the coming 5 to 10 years,” noting he has “no idea about the short term.”
Chinese tech stocks have plunged in the last year due to China’s regulatory crackdown, and looming delisting is risking for Chinese stocks in the U.S.
The Hang Seng tech index has cratered nearly 40% from a year ago. Shares of Alibaba listed in Hong Kong and the U.S. have dived almost 49% in the same period.
Valuations have “become too compelling,” and that’s why Chinese stocks are outperforming the Nasdaq significantly this year, Choraria said. He added, “we’re even approaching the end of the significant regulatory action” on the Chinese tech giants.
In the previous three months, the KraneShares CSI China Internet ETF has grown about 43%, while the Nasdaq has failed by almost 14%.