BABA: Recreating Michael Burry's Deep-Dive (Part 1)

P/E ratio is the wrong multiple: Why BABA's performance isn't as bad as everyone thinks

$BABA black sheep... time for an accounting deep-dive!

Michael Burry, rockstar fund manager of Big Short and Gamestop fame, is well-known for his super detailed deep-dives into stocks. He also recently invested heavily into Chinese stocks, including making BABA his top position. The title of this BABA report alludes to both matters.

This two-part BABA report aims to recreate the accounting deep-dive that Michael Burry would’ve done — and by extention, see what he sees in it. In light of China’s recent “policy bazooka”, I was actually looking around for a good financial analysis of BABA — but was unable to find one, to my great surprise. There are plenty of articles analyzing BABA’s businesses, but few that actually tore apart their accounting by taking a magnifying glass to their financial statements. This BABA “Michael Burry Special” aims to fill that gap.

My initial thought process was that if BABA’s earnings could potentially normalize back to FY20-21 levels (current: FY18-19 levels), that 29x trailing PE could look a lot closer to 15x. However, a closer look reveals that there’s actually much more to the story — its PE ratio is not even the correct multiple to use when valuing BABA.

Long-time value investors will also be intimately familiar with Howard Marks’ (paraphrased) rule: “Cycles Always Recycle.” While much uncertainty remains over the trajectory over China’s domestic economy, BABA itself is actually seeing quite a bit of optimism ahead. Their latest earnings call revealed that China retail GMV (Taobao, Tmall) was showing signs of recovery, while their International segment (Lazada) turned EBITA positive for the first time in July 2024. And while any mention of AI will always sound like a soundbite, there’s plenty of CAPEX activity in that segment belying much more demand than they can keep up with.

The long and short of it is that I think Burry might be right — BABA is actually much healthier from a normalized earnings perspective than most people give it credit for. Granted the bar for its expectations has been set pretty low, but that doesn’t take anything away from its still-growing fundamentals.

In this Part 1 report, we’ll cut through the fat in BABA’s financial statements (FY15-24) and attempt to uncover its future earnings trajectory, as well as discern its fair value. Some of the things we’ll cover include:

• Why the PE ratio is the wrong valuation multiple for BABA;

• How to properly understand BABA’s normalized earnings performance (hint: it’s not Net Profit!)

• How BABA’s management use of the unconventional pro-forma metric Adjusted EBITA can be justified;

• What adjustments are needed to Adjusted EBITA to arrive at BABA’s normalized earnings;

• …and much more! You’ll be able to download my Excel model with BABA f/s data (FY15-24).

In next week’s Part 2 follow-up, we’ll take a surgeon’s knife to BABA’s accounting and cut to the bone analyzing their fundamentals. There we’ll discover what BABA’s true growth drivers are, and how it’s actually a lot easier to analyze than most people think. Once you cut through the noise in their accounting, what really moves BABA’s needle becomes blindingly obvious.

This BABA report assumes that readers already have some basic knowledge of BABA’s businesses. It will not rehash what can be easily found elsewhere — e.g. a business analysis of BABA’s various segments, or the merits & weaknesses of the VIE system. Rather, it seeks to reproduce the research that Michael Burry would’ve likely have performed — a full-fledged accounting deep-dive into BABA’s financial statements over the past 10 years.

I guarantee that by the end of next week’s Part 2, you’ll be able to speak much more confidently concerning BABA’s business segments and their future earnings trajectory than most people can. Remember, narratives lie, but numbers don’t.

BABA: Accounting Deep-Dive (Part 1):

1. Why P/E Ratio is the wrong multiple 

2. Making sense of Adjusted EBITA

3. So what then IS the best valuation multiple?

4. Valuing BABA -- Correctly

5. 📊 Download BABA 3-statement model (FY15-24)



Next Week: BABA (Part 2):

1. Identifying Sources of Underperformance

2. ...🔓

⬅️ If you're on desktop, click the left bar for Table of Contents!

Check out two of my earlier articles linked in this report!

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Why P/E ratio is the wrong multiple

At first glance, it might seem as though BABA’s valuation isn’t cheap. From a low of just 19x PE in April, its shares have since reverted to around its post-pandemic mean of 29x PE. That may not seem expensive, but it sure does seem fairly valued.

However, there’s much more than meets the eye to BABA’s P&L.