Three Wave Move up, into a classic 3-3-5 Correction
Risky Play but I like the backdrop for two primary reasons: One being more anecdotal, and the other deals with CapEx Cycles. I don't pay much attention to anecdotal evidence, but the backdrop surrounding Chinese securities is certainly a risk-off scenario for many investors relative to BABA's return potential. There are lots of fantastic small cap growth companies out there with distinct competitive advantages where you don't have to take on the kind of systemic risk that seems apparent in Chinese securities at the moment.
However, the primary backdrop deals with CapEx Cycles - I was combing through a few financial statements and noticed that BABA management was touting CapEx cuts in 2019 as the primary reason for Free Cash Flow Growth. Logistics companies live and die by the timing of their CapEx structures (too soon and you get a FedEx, right on time and you get an Amazon - in this scenario Amazon got very lucky) and BABA's cut could not have come at a more unfavorable time relative to its biggest peer - Amazon. 2019 was a CapEx year for Amazon, which is already paying off given the current economic backdrop. Now I am sure it was not planned to work out in that manner, but sometimes backdrops work out well; Amazon will more than likely continue to raise their budget throughout the year.
BABA's logistic unit has been a huge cash burn over the years, so in 2019 they decided to cut back CapEx and the overall operating budget, which really drove free cash flow in 2019. The backdrop in 2020 has really changed the landscape and so my speculation is that BABA's capital allocation for 2020 is late to the show, and when you are late to the show in supply chain management your operating costs skyrocket. So my speculation is that BABA massively increases their operating budget for 2020 in order to maintain market share, decreasing free cash flow, and thus impact share price.
However, the primary backdrop deals with CapEx Cycles - I was combing through a few financial statements and noticed that BABA management was touting CapEx cuts in 2019 as the primary reason for Free Cash Flow Growth. Logistics companies live and die by the timing of their CapEx structures (too soon and you get a FedEx, right on time and you get an Amazon - in this scenario Amazon got very lucky) and BABA's cut could not have come at a more unfavorable time relative to its biggest peer - Amazon. 2019 was a CapEx year for Amazon, which is already paying off given the current economic backdrop. Now I am sure it was not planned to work out in that manner, but sometimes backdrops work out well; Amazon will more than likely continue to raise their budget throughout the year.
BABA's logistic unit has been a huge cash burn over the years, so in 2019 they decided to cut back CapEx and the overall operating budget, which really drove free cash flow in 2019. The backdrop in 2020 has really changed the landscape and so my speculation is that BABA's capital allocation for 2020 is late to the show, and when you are late to the show in supply chain management your operating costs skyrocket. So my speculation is that BABA massively increases their operating budget for 2020 in order to maintain market share, decreasing free cash flow, and thus impact share price.