Alibaba split ‘going to be a monster,’ Great Hill Capital Chairman

Great Hill Capital Chairman and Managing Member Thomas Hayes joins Yahoo Finance Live to discuss Alibaba’s seismic split, investor sentiment, the Fed’s next move, and the outlook for the Chinese e-commerce giant.

Video transcript

RACHELLE AKUFFO: Alibaba announced that it will split into six separate units, its biggest restructuring of its 24 year history. Now, this comes as the current Alibaba CEO, Jack Ma, suddenly resurfaced in China after a year long absence. For more on this, let's welcome in Thomas Hayes, Great Hill Capital Chairman and Managing Member. Good to have you, Thomas. So a little bit unexpected. I mean, Jack Ma just now resurfaced in China, and now seeing this split into six units, each will have its own CEO, its own board, potential for IPOs. What are your big takeaways from this move?

THOMAS HAYES: This is a historic day for Alibaba, and it's been a long time coming. This is this is a mechanism to unlock value for shareholders who have been patiently waiting for months and months and months, I know as a major shareholder. And this is just huge. So if you look at the parts, Rachelle, just take the Ali Cloud business, the Ali In business, OK, this business did $11 billion of revenues last year.

McKinsey expects that the cloud business as an industry will triple by 2025. So let's put it at 30-35. They currently have 38% share of the entire market in China right now. So at $30 billion, the operating margins will expand to probably about a AWS range mid to high 20s. So you're looking at $10-$11 billion of operating income. With a fast growing business, they're going to throw the AI business into the cloud business.

So then you apply a normalized 20 times, 25 times multiple, you've got a $200 billion business just in one out of those six pieces. That's the type of value unlock that we're going to see, whether they IPO, whether they spin, it's just a monstrous thing. Oh, and by the way, you get Tmall, Taobao, lazada, you get the logistics business, you get the LMA business, you get the international e-commerce business. So I think this is just going to be a monster.

And every single value investor like myself, we looked at it on a piece by piece basis and we said, the sum of the parts is greater than the whole. Now, the sum of the parts is going to be realized. And if you look, yesterday alone, the business closed at $220 billion valuation, just that one piece can be worth a lot more.

RACHELLE AKUFFO: So then is there still an appetite then to jump in here knowing that Chinese regulators will still be keeping an eye on what happens with Alibaba.

THOMAS HAYES: Well, that's another key reason. So as this huge conglomerate, they were kind of the whipping boy for the entire platform economy. So when the regulators were cracking down-- and they've eased up a bit-- but now with six individual parts, they can kind of fly under the radar and become large businesses unto themselves, but not be this massive business that controls so much of the economy and is so much of a toll taker in China.

So I think this is a good decision from an economic standpoint for shareholders. It's a good decision from a regulatory standpoint. Shareholders are going to love this. It's going to take time to realize the value, but we're off to a good start today, but I think just beginning.

RACHELLE AKUFFO: All right, well, let's also take a look at the value that we're seeing in the market sentiment in US markets today. I mean, some bearishness, we're seeing the sort of mixed picture, the sort of tentativeness at the moment. What level of bearishness are we at, and is it justified?

THOMAS HAYES: We're at some serious pessimism. One of the things that I look at, Rachelle, is the Bank of America Global Fund Manager Survey. And this lays it out. Investment managers are more bearish than they were during the great financial crisis lows. They're more bearish than they were during the euro debt crisis lows in 2011. I know you're too young for that stuff, but I was around.

And the pandemic lows, can you imagine people are more bearish today than the pandemic lows when we didn't know if we would have a vaccine or when we would have a vaccine? And that's where we are. Now, the recession fears, they've come off the peak a little bit, which implies that that's happened, that happened in April of 2020 after the bottom was in, that happened in March of 2009 after the bottom was in. So our base case is that the October lows are solid. They're in. We have some short-term volatility.

But markets don't top. Right now, managers are overweight bonds and cash, and they're underweight US equities and tech. Markets don't top when everyone is overweight bonds and cash. They top when everyone's overweight stocks and overweight stocks in a leveraged way so that there are no marginal buyers. So we're nowhere near those levels. And that's why we remain very constructive on the markets.

RACHELLE AKUFFO: So then in terms of the sectors that you like, I know one of your themes is health care. Break that down for us. What are you seeing?

THOMAS HAYES: Yeah, so the Fed is basically done even if they don't know it, or maybe one more hike if they really want to get aggressive. But in that environment where growth is moderating a little bit below trend, no more hikes, rates are going to start to come down, certainly, you're seeing it in the 10-year yield, that's a good environment for health care. And we like biotech. We like a basket of biotech, XBI ETF.

And this reminds us a lot of the tightening cycle from 2015 to 2018. That ETF collapsed 51% because of the tightening cycle from 2015 to 2016, and then subsequently rallied as the tightening cycle worked its way through and started to end. It rebounded 135% over the next 24 months. Now, the XBI ETF from 2021 to 2022 collapsed 65%. It bottomed in May. It's been grinding sideways for about six months. It just did a little retest to shake everyone out.

We think this is going to be constructive, and we also think we can see triple digit gains now that the tightening cycle is ending over the next 12 to 24 months. So we think there's a lot of opportunity there. And the key drivers, Rachelle, are going to be drugs and deals, OK? That doesn't--

RACHELLE AKUFFO: That doesn't sound great.

THOMAS HAYES: So the drug approvals are coming in fast and furious, Alzheimer's, cancer, because the focus is off of COVID at the FDA and back on to drugs and deals. Big pharma has got $500 billion of cash on their balance sheet, up 400% over the last 20 years. They're coming up to patent cliff, so they're going to have to buy growth, they're going to have to buy innovation. And these deals are going to happen. You know, Pfizer just bought Seagen for $43 billion as you know. That's just the tip of the iceberg.

We're going to see a lot more deals. We're going to see a lot more fear of loss amongst board of directors. That's going to drive the group, and it's going to be very constructive. Historically, the valuations are so low. Just to get back to the average multiple from the past two decades price to book, this sector would have to go up 25%. Price to operating cash flow would have to go up over 155%. And price to forward PE up 110%. So that's in line with our expectations for the next 12 to 24 months.

RACHELLE AKUFFO: So certainly, plays to be made here, not just staying defensive, certainly some options on the table.

THOMAS HAYES: That's right.

RACHELLE AKUFFO: Always good to see you, Thomas Hayes there, Great Hill Capital Chairman and Managing Member. Thank you for your time this morning.