Ticker Banner

Tuesday, October 19, 2021

Charlie Munger’s Firm Doubled Down on Its Alibaba Investment

This is an exciting topic to talk about. 
If you read my article, you know that Charlie Munger, a close friend to Warren Buffett, invested in Alibaba (Ticker: BABA) stock. The stock dropped significantly after his first purchase; however, he recently just doubled down on Alibaba bet.  
I am holding Alibaba stock (Ticker: BABA) as the majority of my portfolioI own 3285 shares of Alibaba at an average cost of $215.45. I am still down about 18% from my average purchase cost. However, I am still confident in this company because it is an excellent value growth stock. Because I am holding Alibaba stock, I am curious why Charlie Munger doubled down on Alibaba stock. This article is going to focus on information about Charlie Munger's recent double-down purchase on Alibaba. Moreover, I am going to mention the bull and bear scenario in investing in this company. 

Still Believing in BABA
In the filing, The Daily Journal disclosed that its stake in Alibaba had risen from 165,320 shares at the end of the first quarter to 302,060 shares at the end of Q3. That's an 83% increase -- a near doubling of Munger's bet. The company's stake in Alibaba now totals about $45 million -- good for about 20% of the Daily Journal's portfolio.
It has been a rough year for Alibaba's stock, as shares are down 38.5% on the year and a whopping 56.3% from all-time highs set back in 2020. Munger is a well-known value investor, so if he thought Alibaba was a good buy in April when shares were priced in the $230-$240 region, he undoubtedly loves it today, when the company is trading in the $140s. It's a perfect example of following Warren Buffett's famed advice: "Be fearful when others are greedy, and greedy when others are fearful."
My stock portfolio is really heavy on Alibaba stock. When the stock price of Alibaba went down significantly, my portfolio was doing very poorly. Many of my friends made fun of me because the stock price of Alibaba went down by a lot from my average purchase cost. They know that I purchased a lot of Alibaba shares in my portfolio.  However, I wasn't afraid or felt upset because I knew that Alibaba's stock was a great company.

But should you follow Munger into Alibaba?
If you're investing your own money, it's generally not a good idea to blindly follow the advice of others, even if they're well-known investors. Famous investors may make mistakes, too, and if a trade goes bad and you don't understand why you hold something, you might panic and sell too soon.
Of course, Alibaba is an intriguing situation because there are many solid reasons for an investor to be bullish or pessimistic at this time of immense uncertainty.
The Bull case on BABA: It looks very cheap.
On the positive side, Alibaba is a significant participant in Chinese e-commerce, payments and finance, and cloud computing. Alibaba appears to be a very safe bet to grow in the years ahead, given its entrenched position in these three high-growth industries and the fact that Munger is known to be positive on China's long-term economic prospects and its rising middle class.

So, when Alibaba affiliate Ant Financial's IPO was halted by regulators a year ago, and its price plummeted, Munger jumped in, buying shares as Alibaba's P/E ratio sank into the high 20s. However, at the time, Alibaba had around $135 billion in net cash and other investments in other companies, so the "core" business was considerably less expensive. Alibaba also has several promising but loss-making companies, such as its cloud computing platform, which has considerable positive value but is now losing money.
Alibaba's valuation has plummeted to just 17.3 times trailing profits over the summer. That's a steal, especially when you consider Alibaba's massive cash and investment assets, as well as multiple loss-making business areas. Despite the current bearishness in Alibaba's shares, analysts continue to forecast the future growth, albeit at a slower pace. Based on 2023 estimates, Alibaba trades at only 13.3 times earnings.
Reasons to be bearish: slowing growth and increased regulations.
On the other hand, Munger may have underestimated the Chinese Communist Party's willingness to continue punishing Alibaba and other Chinese internet businesses. Regulators have proceeded to impose laws on delivery worker compensation and data gathering limits, which could have a broad impact on Alibaba's portfolio of companies, following a $2.8 billion fine for violating antitrust rules in e-commerce in April.

The Communist Party is also attempting to split Ant Financial into three independent companies, ultimately eroding the company's competitive advantage. Even in Alibaba's primary sector, new rules may expose the company's significant cash cow, e-commerce, to more stiff competition.

Its results report for the quarter ending in June, released in August, revealed low revenue, surprising some investors. While headline sales increased by 34%, revenue increased by only 22% outside of a significant purchase — still a good figure, but a slowdown from Alibaba's previous rate. Recent problems at Evergrande (OTC:EGRN.F), a large Chinese real estate developer, could still impact the Chinese economy as a whole. This could affect the Chinese consumer, resulting in fewer purchases and lesser revenue for Alibaba.

Finally, Alibaba recently launched a $15.5 billion "social equity" fund to address societal issues like gig worker welfare, rural development, and small and medium-sized business growth. That fund may or may not have a monetary payout, and some may regard it as a theft or a hidden tax that the Communist Party was likely to have "encouraged."

Finally, ties between the United States and China have been tense, to say the least, and rising tensions could lead to China taking unilateral moves against foreign shareholders in domestic enterprises. Non-Chinese shareholders possess shares in a variable interest organization (VIE) listed in the Cayman Islands, with a contractual right to part of Alibaba's operations. Alibaba is listed in the United States, but non-Chinese shareholders do not directly own shares due to Chinese regulations. If relations between the two nations deteriorate, China may attempt to target the VIE structure and contracts. It's a long shot, but it's feasible.
Factor these things in when looking to buy Alibaba.

Munger has long been a proponent of China's development, and it's safe to say he understands a great deal about the country. On the other hand, other intelligent people have a more negative view of China and its political system.
When investing in Alibaba, investors must have faith that the current regulatory campaign will eventually end or be moderated and that Alibaba will continue to operate as a normal profit-making corporation — albeit with additional rules. Munger believes it will happen after this period of turmoil, but it's far from certain.

My Opinion on Charlie Munger's Double Down on Alibaba Bet & China's Development. 
Personally, I think Charlie Munger made a brilliant move. He is a value investor and follows the rule he preaches. I really believe in China's development. China was poor country decades of years ago. GDP growth had averaged about 10% per year since 1978 when China began to open up and reform its economy, and more than 800 million people have been pulled out of poverty. Over the same time span, there have been tremendous gains in access to health, education, and other services. According to a report published in The National Interest, China is attempting to dethrone the United States and dismantle the rules-based international system that the United States and its allies have constructed since the end of World War II.
I personally have visited China with my dad and brother about a few years ago for a business trip. We were very impressed with the development in China. My father mentioned that China is like the world's factory, and they can produce anything at a lower price than any other country. According to Hurun, China first exceeded United States in the number of billionaires in 2015, and today has more billionaires than any other country on the planet. Around 700 billionaires now live in the United States.
I am very impressed with how China came from a poor country and became today's country. This is also the reason why my father wanted to work together with the Chinese to expand his home appliance company. If we can bring the technique and knowledge of what the Chinese did for their country, my country can grow as well. I believe there are many rooms for my country to improve since labor cost is still cheaper than in China. 
My father's company is a manufacturing company. If my father can work together with the Chinese, we can prosper as well since we can produce products at a lower price. Seeing China's development has made me want to learn Chinese Mandarin, and I believe communicating in Chinese is crucial for my father's future growth in his company. If China can keep growing its nation, there's a possibility that China will be the global superpower in the world one day. I'm pretty sure Charlie Munger sees this as well, and that's the reason why he believes Alibaba is a great company that has much room to grow itself.

I hope this article gives readers the information to Charlie Munger's recent double-down bet on Alibaba. I mentioned the Bull and Bear case scenario to invest in this company. However, I am still bullish on Alibaba stock. I believe China can keep growing to become a stronger country, and I'm sure that the Chinese government won't tarnish the businesses in its own country. As a value investor, I am willing to hold Alibaba stock (Ticker: BABA) for an extended period of time. I'm not afraid of the stock drops further since I know the business fundamental of the company's performance. Let's see what will happen a few years from now, whether my investment is smart or not. I will keep readers updated!

No comments:

Post a Comment