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Alibaba, Burry's 4th Largest Holding, Pops 15%
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On February 14th, 2023, we put out an alert that highlighted Michael Burry’s recent stock holdings. Within the article we highlighted eight different stocks that Burry was investing in and why he was buying these stocks. One of the stocks Burry was buying was Alibaba (BABA), is now his 4th largest holding. We stated the following:
Alibaba BABA 4.33%↑ is a beaten down Chinese tech company that has been called the Amazon of China. Legendary investor Charlie Munger has been purchasing Alibaba for The Daily Journal’s portfolio. If you don’t think the Chinese government will steal the assets from outside shareholders, it likely has tremendous value and strong upside.
Since our alert of Burry buying back on 2/14/23, the stock price has fallen 21% (before today). Alibaba was at $104 per share on February 14th and fell to a low of $82 per share. Today the stock was up 15% on news the company is splitting off into six different companies.
On all of my years on Wall Street I have yet to see a company split off into six different companies. Companies usually split off into two different companies — which generally creates shareholder value — but six different companies?! That should create a lot of shareholder value.
The reason why splitting a company into pieces creates shareholder value is from the sum-of-the-parts valuation method. In a sum-of-the-parts valuation method, analysts value each business unit individually and derive a value much higher than the consolidated entity. When a company splits off their business into separate companies, this valuation gap is then closed.
In addition to realizing the sum-of-the-parts valuation, each business can then focus on allocating excess cash flow to their own business unit. When companies are grouped together in a conglomerate, the management team tends to allocate resources to their favorite portion of the business, disregarding other entities. Once split off from the parent company these individual companies tend to thrive and create even more shareholder value. There is a reason why Joel Greenblatt (a legendary Hedge Fund Value Investor) loves spinoffs.
Finally, Alibaba has traded off because investors were scared that the Chinese government would steal the company from U.S. shareholders. With six different companies the Chinese government would now need to steal six different businesses, which is probably even less likely to happen.
Investors seem excited about this news and the stock will likely go higher. For the Amazon of China, Alibaba has a P/E ratio of only 11x, compared to the 70x P/E ratio for Amazon. Granted there are “China” risks, the margin of safety here looks pretty compelling and the spin-off into six different companies shows that the management team wants to create real shareholder value. Barclay’s analyst, Jiong Shao thinks so too…
Barclay's analyst Jiong Shao called Alibaba's (BABA) six-way split-up plan "a significant step towards shareholder value creation," and could end up far exceeding the company's current valuation.
"We had been hoping Alibaba would spin off certain highly valuable [subsidiaries]," Shao said. "But this master plan to split the company into six units may be even better."
Burry likes buying cheap stocks because when stocks get this cheap the management team only has to do a few things right and there is value created. This is a great example of how management created value with an ultra-low stock price.
Like we mentioned though, BABA 0.00%↑ is down 6% from when Burry filed, so copying the trade here would mean a better price than months ago. If you'd like to get started with Autopiloting Michael Burry's portfolio automatically, do so below.
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*As always, none of this is financial advice as the purpose solely is to educate you on why we believe Burry owns BABA 0.00%↑ .