My hat goes off to Jack Ma at Alibaba who's built a great company. Jack, 50 years old, could catch Buffett in 5 years. Fifty years ago the magic words were plastics, Polaroid’s instant color film, Syntex’s “The Pill” and
BABA traded over 271 million shares, approximately $25 billion coming out of its newly built cage at noon last Friday. Such volume approached a one times turnover of underwritten shares. I stood ready to buy BABA at 20 times my 2016's projected earnings of $3.65 a share, or $73. The market’s put nearly a 30 multiplier on my numbers.
Facebook sells a 27 times my 2016 projection, but is cheaper on an EBITDA metric of 15 times with BABA at 20 times. Which is the governing metric
Tot up the market capitalization of Facebook, eBay, Amazon and now BABA. Throw in Google. We are talking a combined market capitalization over $1 trillion. This is equivalent to ExxonMobil, JPMorgan Chase, Wal-Mart, 4 General Motors and Walt Disney. Even 2 Apples at $600 billion, each.
I did buy Google shortly after it went public. Later, I took on Facebook because I believed the analyst fraternity had it all wrong. They believed Facebook would find it slow and torturous to migrate advertising revenues from computers to smart phones. It would take years - if then. But, the migration was painless and happened in under 12 months.
Buying BABA in the nineties, even the eighties violates all my disciplines accreted over 50 años. I have no feel for how long they can grow revenues and earnings 40% to 50%. Maybe, in a couple of years, it's 20% or less and then BABA’s valuation metrics plummet.
The checkered history of growth stocks favors my side. Few meet the standard of compounding earnings even at 15%, for more than 5 years. Only a handful last for 10 years. Think of Polaroid, Haloid Xerox, Eastman Kodak and Syntex. Other names from the past: Hertz, Transitron Electronic and Comsat, Vendo, AOL, The New York Times Company. Even Pfizer and Peabody Energy. They all faded badly.
Once mighty First National City Bank (the old Citigroup) sold at over 20 times earnings in 1972 and resided in Morgan Guaranty Trust’s one decision portfolio of growth stocks. All got schmeissed in the 1973 - 74 recession. By 1975 Morgan transmogrified itself back into a traditional value manager.
Bubble, bubble, where's the bubble? Go back to the Internet insanity of 1999 when stocks sold on clicks, swipes and pops. Everyone slept with Wired magazine under his pillow and played the game. JDS Uniphase, Yahoo, AOL, Akamai Technologies and Exodus Communications. Average losses for smaller cap Internet properties ranged from 80% to 90%. Big cap tech destruction was analogous. Losses of 60% to 80% embraced Intel, Cisco Systems, Oracle and Sun Microsystems.
Many of these ragamuffins never came back. Today, Microsoft is considered a legitimate turnaround story with a foothold in cloud computing, not a monopolist. Hewlett-Packard, even Cisco strive to remake themselves along with IBM and Intel.
Is Buffett wrong staying away from technology paper? Probably. After all, Apple is analyzable as a value property laden with cash. What else could Carl Icahn have known before his $4 billion gut play now worth over $5 billion? Icahn’s current net worth is pushing $30 billion. Carl doesn't polish his image like Warren does, but Buffett’s net worth is double Carl’s.
Can Carl catch Buffett in another 5 years? I don't see ExxonMobil, IBM, Wal-Mart and the Burlington Northern Railroad taking Warren to the moon, but they’re a hunk of the U.S.A., which is what he wants. I like Buffett’s triple overweighting in financials next few years, but Wells Fargo is too safe for me. I'm willing to bet JPMorgan, Citigroup and Bank of America don't bury themselves with their derivatives portfolios, unanalyzable to each and every one of us.
After 50 years, I'm still a number in a brokerage house’s ledger book. I head a mid-sized money management firm and consider myself a manufacturer of money, which turns ephemeral in a bear market.
What's not to like about BABA but its present price tick? Gilead Sciences was my gut play couple of years ago, but a disciplined move. Analysts used a discounted cash flow metric analysis for valuation. I decided that for at least a couple of years, Gilead would sell on its price-earnings ratio metric. I was right and Gilead soared over par from the mid-twenties. At least for now Gilead is a $12 a share earner.
With no perceptual edge on how to value BABA, I dare not play. When our government back in the early sixties privatized Comsat, most every grandmother with means in the country bought 10 shares for each of her grandchildren. Management then proceeded to destroy their satellite franchise with foolish deals and fallow research priorities. Who could know the dream would shatter?
Is BABA the next Polaroid, Eastman Kodak or Syntex? No way. Internet commerce must put bunches of shopping centers out of business within time. My recent shopping escapade is revealing. In Toronto for their film festival I needed a pair of docksiders to walk around in.
I bought a pair of Sperry Top-Sider Gold Cup with a memory foam cushions and genuine lambskin linings - for $200 with sales tax. Back home, I went to their website and saw comparable offerings for $150, with more color choices and lower price points as well. None of this was available in the Toronto store. I bought a pair in tan and another in white. The laces were generously thick.
Obviously, I’ll never enter a shoe store, again. Do you hear me, Jeff?
Sosnoff owns personally and / or Atalanta Sosnoff Capital, LLC owns for clients the following investments cited in this commentary: Facebook, Google, Apple, Amazon, JPMorgan Chase, Walt Disney, Citigroup, Cisco Systems, Microsoft, Hewlett-Packard, Wells Fargo, Bank of America and Gilead Sciences.
Follow Martin T. Sosnoff on Facebook
