Alibaba Group Holding Ltd (NYSE:BABA) shares almost doubled since the US presidential elections. As a long-term Alibaba Group Holding Ltd shareholder you may be more determined than ever about the long-term success of BABA shares but one of our favorite hedge fund managers has a better investment idea if you are bullish on BABA.
Anthony Bozza’s Lakewood Capital is one of the better performing long-short equity hedge funds in operation today. In its Q3 investor letter Anthony Bozza suggests a better investment idea for long-term Alibaba Group Holding Ltd shareholders (see Lakewood Capital’s 2017 Q3 investor letter).
Here is what Bozza said in his investor letter:
Softbank’s primary operating business is its domestic wireless business. The wireless industry in Japan is an oligopoly as three players (NTT Docomo, KDDI and Softbank) control the market. The industry is mature with low churn and stable profitability. Softbank utilizes the cash flow from this business to diversify and grow its investment portfolio. Using a 6x EBITDA multiple, which is consistent with peers, we estimate that this business is worth $65 billion. Softbank’s other primary operating business is ARM Holdings, the U.K.-based licensor of microprocessor technologies that Softbank acquired last year for around $30 billion. Together, we value these businesses at ¥9,850 per share.
The bulk of Softbank’s remaining value comes from its public stakes in Alibaba, Sprint and Yahoo! Japan, as well as its significant portfolio of private investments. The company’s 25% stake in Alibaba is worth $120 billion, or ¥12,365 per Softbank share. Softbank also owns 85% of Sprint, a stake worth $24 billion, or ¥2,460 per share. Additionally, Softbank has a ¥1.3 trillion stake (¥1,175 per share) in Yahoo! Japan, a leading internet portal in Japan. While these public stakes alone amount to ¥16,000 per share (60% above the current share price), Softbank also has a portfolio of private investments, consisting primarily of stakes in leading ride hailing and e-commerce platforms in Asia. These investments are valued on the balance sheet at ¥2,300 per share. While we think there could be substantial upside to the private investments over time, we do not ascribe any premium. Together, Softbank’s public and private investments have a gross value of ¥18,300 per share. We think a substantial discount is being placed on Softbank’s public holdings due to the recent rapid appreciation in the value of the Alibaba stake and the market’s persistent focus on uncertainty around the company’s investment in Sprint. While Softbank shareholders have been slow to recognize the increased value of the Alibaba stake, we expect this significant value will ultimately be reflected in the stock price. And, while Sprint is undoubtedly a substantial holding for Softbank, it amounts to less than 15% of the total investment portfolio. Also, an expected merger with T-Mobile would represent a significant positive development as Sprint would become a scale number three player in the consolidated U.S. wireless market. We conservatively apply a 30% discount to all of its investments and arrive at a net value of ¥12,810 per share.
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