David Tepper (Trades, Portfolio) is a legendary investor who is the founder and portfolio manager at Appaloosa Management. This is an investment firm with $1.59 billion in U.S. common stock positions as of its latest 13F report for the second quarter of 2020, which ended on June 30.
Tepper’s firm focuses a lot on distressed debt investing, which is not accounted for in the 13F. However, from what we do know from the 13F reports, he was buying shares of a few potential “turnaround” stocks in the second quarter of 2022, most notably Alibaba (BABA, Financial) and Netflix (NFLX, Financial).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Alibaba
Alibaba (BABA, Financial) is one of the largest e-commerce companies in the world, operating an e-commerce network for consumers and businesses alike. It also has a growing cloud business.
The stock price has been butchered since November 2020 and is now down ~70% from all-time highs. This was driven not by the general economic conditions but rather by a combination of a tech regulatory crackdown in China and the U.S. government passing legislation to eventually de-list Chinese stocks from U.S. exchanges.
Then the company had a few bad quarters due to the tanking economy, which certainly didn't help issues. Those hoping for an easy resolution to the U.S.-China regulatory fight had the wind knowcked out of their sails when the SEC put Alibaba on a list for potential delisting from the New York Stock Exchange.
The fear of delisting has kept Alibaba stock depressed and shaken Chinese stocks in the market. However, recently there has been solid progress in talks between Chinese and U.S. regulators. As of late August, the U.S. Public Company Accounting Oversight Board (PCAOB) signed a “cooperation agreement” with Chinese authorities.
The PCAOB is set to arrive in Hong Kong in mid-September in order to inspect financial auditing for Alibaba and other Chinese stocks listed on U.S. exchanges. According to SEC chairman Gary Gensler, “A normal inspection period can take up to three months,” but they should know if China is following through on delivering these companies' books by October. This process will be very in-depth and even involve interviews with the people who did the audits.
There is still some uncertainty on which information Chinese accounting firms should or shouldn’t reveal. Honestly, everything is still up in the air at this point, though personally, I think Alibaba will be fine even if it is delisted from U.S. exchanges (though its stock price might remain depressed for longer if that turns out to be the outcome).
Despite the uncertainty regarding U.S.-China Relations, Tepper's firm bought Alibaba stock in the second quarter, purchasing 100,000 shares at an average price of $98 per share, which is ~6% cheaper than where the stock trades at the time of writing.
Another legendary investor who owns Alibaba is Buffett’s right-hand man Charlie Munger (Trades, Portfolio), although he did reduce his position in early 2022 after only buying a few quarters prior. The world's largest hedge fund manager, Ray Dalio (Trades, Portfolio). sold out his entire Alibaba position in the second quarter, so it is clear there are mixed opinions about the stock, which is further evidenced by this GuruFocus chart showing historical quarterly guru buys and sells of the stock:
Alibaba did report solid financial results for the second quarter of 2022. Revenue was $30.7 billion, which surpassed analyst expectations by $530 million, even though it was flat year over year. Earnings per share also increased to $1.75, which surpassed analyst estimates by $0.19.
Alibaba is trading at a forward price-earnings ratio of 12.7. This is ~50% cheaper than its five-year average. The GF Value line also indicates a fair value of $347 per share and thus the stock is “significantly undervalued” at the time of writing.
Netflix
Netflix (NFLX, Financial) is another company that has seen its stock price get decimated over the past year. The stock price is down 66% from its all-time highs but has popped by 33% over the past two months, which is a positive sign.
Tepper's firm purchased 50,000 shares of Netflix stock in the second quarter at an average price of $224 per share. This buy price was ~4% lower than where the stock trades at the time of writing.
Netflix reported a subscriber loss of 2 million in the first quarter of 2022, which decimated the stock price. However, by the second quarter of 2022, this loss had narrowed to 970,000 subscribers. The company also issued a series of new initiatives which included charging extra fees for shared accounts and other changes to its services. The company announced the rollout of an ad-supported tier of its service and partnered with technology giant Microsoft (MSFT, Financial) to help with the implementation of this. Wall Street is extra sensitive to growth stocks right now, and it's possible that Netflix may no longer be classified as a growth stock due to market saturation and increased competition, but I believe the company has taken strong action and could recover.
Netflix generated strong financial results for the second quarter of 2022. Earnings per share was $3.20, which beat Wall Street expectations of $2.94 per share. However, revenue did come in lower than forecasted at $7.97 billion vs. $8.035 billion.
Netflix trades at a forward price-earnings ratio of 22.6, which is ~70% cheaper than its five-year average. In addition, The GF Value line indicates a fair value for Netflix of $621 per share and thus the stock is “significantly undervalued."
Final thoughts
Both Alibaba and Netflix are huge companies that have seen tremendous sell-offs. It seems possible that Tepper's firm has seen these declines as opportunities to acquire the stocks cheaply. Alibaba is primarily held back by political uncertainty, while Netflix faces more fundamental business challenges. Both stocks could recover over long term in my opinion, but still, much uncertainty remains.
