David Tepper of Appaloosa Management is one of the most successful investors of his generation. His investment prowess has not only made him a billionaire, but it has also allowed him to become the owner of two professional sports teams: the NFL's Carolina Panthers and Charlotte FC in the Major League Soccer (MLS).
At the end of the first quarter, Tepper's portfolio was, not surprisingly, filled with a number of market-leading stocks. In fact, five of his top-six holdings were Magnificent Seven stocks, including Amazon, Microsoft, Meta Platforms, Nvidia, and Alphabet.
However, his top holding -- representing about 12% of his portfolio -- was in the beaten-down Chinese company Alibaba Group (BABA -0.51%). Let's look at what may have drawn Tepper to take such a large position in the company.
Cheap valuation
One of the first things that sticks out when evaluating Alibaba is just how cheap the stock is. Trading at a forward price-to-earnings (P/E) ratio of just 9, Alibaba is very inexpensive, especially compared to its closest U.S. competitor Amazon, which trades at about 41 times earnings. Alibaba is trading very cheaply from a historical perspective as well. Prior to COVID-19, it often commanded a P/E of 40 or more.
BABA PE Ratio (Forward) data by YCharts.
Large cash position and prolific cash flow
Alibaba's large cash position on its balance sheet is another reason to own the stock. The company also has a large portfolio of investments in publicly listed companies as well. On top of that, it continues to generate strong cash flow. In its fiscal 2024, ended in March, Alibaba produced $25.3 billion in operating cash flow. Free cash flow, which subtracts out capital expenditures (capex), was $21.6 billion.
That type of cash and cash generation gives Alibaba a lot of flexibility on the capital-allocation front to buy back shares, pay a dividend, and invest in its business. Last quarter, the company spent $4.8 billion buying back 524 million ordinary shares (65 million ADS). It also paid out a regular dividend of $1 per ADS for the year and a $0.66 per ADS special dividend. The company added $25 billion to its repurchase plan back in February and extended it through March 2027.
Alibaba's strong cash-flow generation and cash position are also allowing it to invest in its various businesses.
Turnaround potential
This investment back into its businesses should help set the company up in its turnaround efforts. Within its Taobao and Tmall Group e-commerce segment, the company is investing in product supply, competitive pricing, and quality service to help drive growth in a competitive Chinese e-commerce market. It's looking for these investments to lead to a gradual return to healthy gross-merchandise value (GMV) growth as the platform's overall shopping experience improves and the Chinese economy picks up.
Meanwhile, the company is also investing in artificial intelligence (AI) to help drive cloud-computing growth. It is integrating its Tongyi large language model (LLM) with its Alibaba Cloud's services to look to become the leading AI development platform in China. At the same time, it has been letting unfavorable low-margin, project-based contracts roll-off and is expecting this segment to return to double-digit growth in the second half of the 2025 fiscal year.
The company's efforts in this area could be seen in its latest quarterly results as cloud intelligence group revenue rose 3% to $3.5 billion, but earnings before interest, taxes, and amortization (EBITA) surged 45% to $198 million.
Alibaba is also investing heavily in its international e-commerce businesses and related logistics. Led by its AliExpress and Trendyol cross-border business, the company saw international commerce retail revenue surge 45% last quarter to $3.8 billion, while its Cainiao smart logistics-network revenue climbed 30% to $3.4 billion as the company continues to build out its cross-border fulfillment services supporting AliExpress.
As Amazon has shown in the past, while these types of investments may initially negatively impact profitability, they generally pay off with stronger margins and profits down the line.
Image source: Getty Images.
Should investors follow Tepper and buy the stock?
While Tepper has had huge success as an investor, not every investment he's made has been a winner. However, Alibaba holds a lot of potential to be another one of his big winners. The stock is incredibly cheap, and the company has planted the seeds to begin a nice turnaround in the business. As such, I would follow this billionaire and be a buyer of the stock at current levels.
