Shares of Alibaba has been under pressure since the Halloween of 2020 with the Chinese government scrutinizing the company with investigations and restrictions on their practices. Furthermore, the continued Covid lockdowns have been hampering any economic activities in China. However, we believe ultimately China will re-open, the economy will grow, and Alibaba as a giant entity in the Chinese economy will be allowed to grow again once they straighten things out with the government. From a top-down approach, Alibaba is our diversification play into the Chinese economy.

The company reports in four main segments: Core Commerce, Cloud Computing, Digital Media & Entertainment, and Innovation Initiatives & Others. Core Commerce - China accounts for ~66% of revenue and is growing at 46% (as of 2021 data). The company reports other subsidiaries under Core Commerce (such as international brand), which account for about 20% total revenue. Cloud Computing accounts for ~8% of revenue and is growing at a fast 54% pace (as of 2021 data). Digital Media & Entertainment remains small at ~5% and is growing at 8% per year. Innovation Initiatives & Others is ~1% of revenue, actually declined by 25% in 2021.

To be clear, we don't think BABA is a screaming buy at this valuation level. We only want to keep a very small position in this name, ~1%, mainly as a play on the China economy ultimately recovering from Covid-related shutdowns.

Alibaba trades at ~16x estimated 2023 earnings, with a long-term growth rate of 11%. On a 10-year average basis, the forward P/E multiple for Alibaba has been 24.5x. Now, the stock is not cheap for no reason. The primary risk is that this is a Chinese company and as a result, is at risk of the whims of the People's Republic of China (PRC) which has much more authority over companies and can act without question should they desire, as current shareholders have been painfully reminded of in the past two years. The other risk often brought up is that when a U.S. investor buys shares of BABA, the ownership structure is not the same as when one purchases a U.S. company. While a purchase of U.S. securities in a U.S. company represents ownership in the company, in the case of BABA purchasers of the security are actually buying shares in what is known as a variable interest entity (VIE) based in the Cayman Islands which has in turn established an agreement with Alibaba the company for the rights to the profits generated by the company -- i.e., BABA owners own rights to the profits, but do not technically own shares in the company or its assets.