Billionaire David Tepper's recent 13-F filing with the SEC caught investors' attention for an aggressive investment in a surprise stock. The document revealed that his Appaloosa fund increased his stake in China's leading e-commerce conglomerate, Alibaba (BABA +0.82%), by 159% in the first quarter of 2024.
This comes as investors have avoided Alibaba and other Chinese stocks amid rising U.S.-China tensions. However, such an aggressive stake by a noted hedge fund investor could make some investors rethink Alibaba. If one wants to follow Tepper's move, they should evaluate both the stock itself and the risk tolerances to determine whether that investment is a fit for them.
The risks of Alibaba
It goes without saying that risk-averse investors should not follow Tepper's example in this case. Unfortunately for these prospective shareholders, most of the perils of owning this stock remain.
One danger is the stock itself. For one, Alibaba stock is not actually stock in Alibaba. Instead, it is an American Depositary Receipt (ADR), a bank-issued certificate representing Alibaba shares. Such arrangements are usually not risky, and many of the most respected international stocks are ADRs.
Still, ADRs of Chinese companies became very risky when the SEC threatened to delist Alibaba in 2022. China denied U.S. regulators complete access to the audit working papers of Alibaba and other Chinese companies.
The threat abated when China and the SEC reached an agreement. Nonetheless, it made investors nervous about investing in such stocks. Moreover, with U.S.-China relations still strained, a renewed delisting threat over a different issue is a distinct possibility.
The case for owning Alibaba
Although 13-F filings do not explain why someone buys or sells a specific stock, investors should remember that David Tepper is a seasoned, successful investor. Although he can make mistakes, the fact that he sees more benefits than dangers speaks to Alibaba's investability.
Furthermore, Tepper may be a follower in this regard. In January, Alibaba co-founders Jack Ma and Joe Tsai bought more than $200 million worth of shares. As noted, Tepper owned a stake in Alibaba at that time, but Ma's and Tsai's move could have influenced Tepper's latest purchase.
Furthermore, the stock is cheap and on the rise. It has increased by almost 30% since its 2024 low on Jan. 18. Additionally, it trades at a P/E ratio of around 20. While not as cheap as its earnings multiple of 10 from late last year, shares may still look inexpensive considering the company's growth.
NYSE: BABA
Key Data Points
Tepper may also be looking at the valuation from a longer-term perspective. Its net income of 71 billion renminbi ($11 billion) in fiscal 2024 (ended March 31) rose by only 9% from the previous fiscal year.
Nonetheless, Alibaba stock trades at just below its IPO price from nearly 10 years ago. At that time, in fiscal 2014, Alibaba earned 23 billion renminbi ($3.25 billion). Thus, investors can buy Alibaba below the 2014 price, even though the company generates more than three times as much profit today. Such a difference may be what attracted the interest of Tepper and Alibaba's co-founders.
Investing in Alibaba
Ultimately, risk-tolerant investors can feel comfortable following Tepper into Alibaba stock. Tensions between the U.S. and China remain, and because that can easily spill over into Alibaba stock, risk-averse investors should probably avoid this stock.
However, the fact that investors can buy 2024 profits at a 2014 stock price makes Alibaba stock compelling to the risk tolerant. With Alibaba likely to remain one of China's leading businesses, it could produce considerable returns if outside concerns don't sabotage this stock.
