What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing over the past few months, kathy wood dumped substantially all of her arc invest holdings in chinese stocks. As of april, she owned more than 3 million shares of chinese search engine baidu. She has subsequently dumped the entire position. It's a similar story for video game live streaming, company, hui and social media giant tencent between all the arc etfs.

There are only five chinese stocks remaining, but they are tiny positions amounting to not much more than a rounding error for her to dump. All of her shares so quickly is highly unusual as she is usually a long-term investor. For example, she held tesla for years as his stock moved sideways and eventually reaped the rewards when it mooned in 2020.. So why did she sell all these stocks with most of them being well below her cost basis in this video we'll go over her reasoning, we'll also explain why we think many chinese stocks provide growth opportunities and valuations too attractive to ignore, even despite the risks we Already know a lot of you guys, don't like chinese stocks, it's great that there's a diversity of opinions and you obviously need to do your own research and build your own conviction before making any investments.

But with everyone saying to dump chinese shares, it's important to hear the other side of the argument. If you only follow the crowd, you'll never make above average returns with. That being said, we are not financial advisors, and this video is for entertainment purposes. Only make sure you do your own research and consult with a professional before making any investment decision.

With the dd fiasco and de facto nationalization of education companies. Investors have been dumping their chinese holdings hand over fist. Investors now view china as too unpredictable and dangerous to invest in on august, 7th kathy wood hosted a webinar where she explained her rationale for selling her chinese holdings. Last thing.

Capital may be flowing uh to uh our economy and other developed markets and maybe other emerging markets from china. Because of what has happened recently, um the the government is cracking down. Um it ha it. Uh has uh strengthened its crackdown, it started with jack ma.

We just thought that was a bit of a power play last november, but that was really the beginning of a number of moves having to do with david data privacy data leakage. Data leakage would be dd which, right after it, ipo'd uh the government. Basically, in effect, is, is, is uh trying to shut it down uh, but we don't think it's entirely uninvestible. We know that china does want to become the largest economy in the world, wants to be the most innovative in the world as well wants to dial down some of the mass media products and the inequity that has taken place.

But i don't think it wants to shut its economy down to determine whether chinese stocks are uninvestable. We must figure out the objectives the government is trying to achieve with their recent crackdowns and how far they'll be willing to go. Like kathy woods said, they still have ambitions to become the world's largest economy and leader in technological innovation. To achieve this, they will need their domestic technology giants to continue growing.

Now, let's look specifically at what happened with dd just a few days after they ipo'd on the new york stock exchange, china announced that they are suspending the ride-hailing companies app from the app store and is conducting a data privacy investigation. Some observers view this as a cash grab by the chinese government. They wait for u.s investors to buy shares and leave them holding the bag as they tank. The stock dd raised 4 billion dollars from the ipo.

China has a 15 trillion dollar economy, so 4 billion dollars is not enough to matter so this was not a money grab. The real reason is because of data privacy violations. Dd collects immense amounts of data from its passengers. Many chinese government employees write dd in 2015.

Didi published a report saying that many chinese ministry employees were working overtime as they were hailing rights as late as 2am if they know which government agencies are working overtime. This could reveal that these agencies are preparing to rule out some new actions. This kind of speculation could undermine the confidentiality of their work in the ipo process. Dd executives could potentially divulge confidential information to foreign investors.

This is one reason why the crackdown coincided with the ipo. It wasn't just an arbitrary cash grab. It was a specific situation relevant to dd. The next issue is the crackdown on education stocks.

They lost almost all of their value, as the government announced that it would force them to turn into non-profits. This was obviously a disaster for anyone investing in these stocks, as tens of billions of dollars of value were wiped out overnight. This also compounded fears that the chinese communist party was not friendly to private enterprise, but you have to look beyond the alarmist headlines to see. What's actually going on, china's existing education system is basically a rat race where parents are obsessed with getting their kids into a top university.

They view this as the only way to be successful in life and gain respect within society. For-Profit education companies in china have been taking advantage of this for years by charging exorbitant prices for extracurricular tutoring. They use aggressive advertising to convince working-class families to spend thousands of dollars on private education. This is often money that they can't afford.

It's allowed companies like new oriental education to extract tens of billions of dollars worth of profits from the people without creating any real value. There's a limited number of spaces at the universities anyway, so that all these companies are doing is making the rat race more competitive. From an outside observer's perspective, the chinese government's crackdowns may seem chaotic and draconian, but they're, actually quite sensible, they're cracking down on dd to protect data, privacy and they're cracking down on the for-profit education industry to reduce the stress on students and the financial burden on parents. From an investing perspective, china is still investable, but you have to be careful right now.

The mainstream investor sentiment is at an all-time low, but it's not always the right decision to just follow the crowd. If you do, this you'll always be one step behind. For example, jim cramer told his viewers to buy as many dd shares as they could at the ipo, because the 60 billion valuation was reasonable. A few weeks later after dd tanked, he said you can't own chinese stocks.

All stocks have wide swings based on investor sentiment. If you always buy, when the sentiment is good and everyone is telling you to buy and sell, when sentiment is bad you'll always be buying high and selling low. This is exactly what kathy wood did in the beginning of 2021, as bill, huang was pumping up, the price of baidu sentiment was high and she increased her cost basis. By buying millions of shares.

When sentiment turns negative, she sells everything at a huge loss. There will always be ups and downs with chinese stocks. There is always risk and some of them will fail in the long run, but as an investor, you have to make your own decisions, look at what the company is worth and what the risks are. Regardless of what the stock price does in the short term, in our opinion, you should invest in innovative companies that create real value for the chinese economy.

There can always be bumps along the road, but in the long run these types of companies will thrive because they align with the government's long-term development goals. The for-profit education companies certainly did not fit this description and their investors paid the price. In our opinion, one of the most undervalued chinese stocks right now is the e-commerce giant alibaba. I personally have been building up a position in the stock over the past few weeks as its tanked, which i intend to hold for many years.

Nobody knows where the stock will trade over the coming weeks or months, but i think it could easily double over the next five years based on the fundamentals of the business, and it's not just me who thinks it's undervalued to take advantage of the depressed share price. Alibaba recently announced that they will repurchase 15 billion dollars of their own shares. This is the largest buyback in the company's history. Alibaba is the largest ecommerce player in china, with their alibaba.com wholesaling platform, as well as their more consumer-oriented websites, including tmall and taobao.

They have over 1 billion annual active customers, with 891 million being within china and 240 million being outside of china. That means more than 60 percent of the entire chinese population uses alibaba. They have achieved this market dominance by investing heavily in innovation. They have arguably the most sophisticated and advanced logistics network in the world, with autonomous robots, moving loads of up to 500 kilograms around their warehouses, they're expanding internationally and out competing amazon in many asian and european countries on top of ecommerce.

They also have a cloud computing division that generated 9 billion of revenue last year, it's similar to amazon's, aws, they're, constantly innovating and creating new businesses. For example, they launched the fully automated hema grocery store where you can purchase items by scanning their barcodes with your phone. We don't have time in this video to go over the entire ecosystem, but it is massive and continually expanding. All this innovation has resulted in one of the most impressive growth track records of any company in history.

Since 2010, their revenue has increased at a 45 compound annual growth rate and they made 23 billion dollars of net profit in the most recent fiscal year. Just looking at the fundamentals, it's an obvious buy after the recent pullback, the stock price is 196 dollars. A share. Giving them a 532 billion dollar market cap.

This gives them a 23 times price to earnings, multiple based on last year's earnings, but that includes their cloud and media businesses that are currently losing money. Those are valuable businesses that are still in hyper growth mode, they're losing money now, but will likely be very profitable at scale. If you strip out these losses from the businesses, you get a price earnings ratio of 19 times. Compare this to amazon, which has a price earnings ratio of 58 or almost three times alibaba.

This is despite the fact that arguably alibaba has a much greater growth outlook, as the chinese economy is growing much faster than the us based on their growth prospects. I think that alibaba could easily be worth one trillion dollars within the next five years, which would see the stock price double. Of course, there are risks with the stock, but as an investor, you have to weigh the possibilities of future outcomes and determine the future value and expectation. The main reason that alibaba has tanked so much recently is because of the chinese government's recent crackdowns in may.

They had to pay a 2.8 billion anti-trust fine and, in the future, they'll almost definitely have similar issues that they have to sort out with the regulators. But this is nothing unusual. All of the u.s tech giants have received regulatory scrutiny in the us and europe, with some of them being much more serious than anything alibaba is facing. In recent years, google has faced seven different major antitrust investigations with some of them still ongoing.

In one of these cases they had to pay five billion dollars to the european union, but nobody is saying that google stock is uninvestable because of these regulatory issues. In fact, google is one of the top seven stocks held by hedge funds. Every mega cap tech company will face scrutiny, but they're usually able to come up with a reasonable settlement to maintain their long-term growth story. In the case of alibaba, they are the backbone of chinese innovation and global competitiveness.

Their business model is aligned with the government's goals of increasing economic development and the quality of life for the people. There's no reason to believe that the government would stifle them to the extent that they can no longer innovate and grow. Alright guys that wraps it up for this video, what do you think about alibaba or chinese stocks in general? Let us know in the comments section below, if you enjoyed this content, make sure to hit the like button and subscribe. So you don't miss future uploads.

As always, thank you so much for watching and we'll see in the next one wall. Street millennial signing out.