Alibaba Stock: Munger’s position halved, what about yours? (NYSE: BABA)

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Thesis

Many Alibaba Group investors (NYSE: BABA) (OTCPK: BABAF) likely included Charlie Munger shares as part of their investment decision. Indeed, the legendary billionaire doubled his BABA position twice in 2021 in the middle of the market concerns, and both times created a splash of news and major stock price moves. But the most recent filing by the Daily Journal Corporation (DJCO) reported that his BABA position had been reduced by about half, as you can see in the chart below. To add to the ambiguity, he also announced that he had relinquished his role as chairman of the Daily Journal Corporation, a position he had held since 1977. Going forward, Munger would remain a director and continue to be involved in his portfolio of securities.

This article is my attempt to interpret Munger’s thought process surrounding his BABA positions. As his role at DJCO comes to an end, we can no longer rely on his actions to guide our decisions BABA and we will have to rely more on our own judgment. By rearranging Munger’s thoughts, we can get an idea of ​​not only BABA, but also other investment opportunities.

Then you’ll see my view is that what happened between the third and fourth quarters of 2021 best illustrates Munger’s wisdom of buying good deals off the operating table, and I still stand by that view after DJCO recently reduced BABA’s position.

Charlie Munger holdings of Alibaba

Source: dataroma.com

Munger and BABA

The following table summarizes the key events that led to Munger’s actions. As you can see from the chart below, it started buying BABA shares in the first quarter of 2021, after a sharp correction in its share price caused by the cancellation of the highly anticipated IPO of Ant Group. It then doubled its stake in Alibaba twice: first in the third quarter of 2021 and then again in the fourth quarter of 2021.

There are certainly good reasons for Munger’s decision. As mentioned above, the market reacted too quickly based on perception (based on the information available at the time). As a result, even though BABA’s core business is intact, its valuation became too compressed when Munger pulled the trigger to double his bets. It’s a textbook that reflects his wisdom of buying a bargain on the operating table. At the prices it bought into BABA, it was valued as a cheap and stagnant terminally ill company, while its fundamental fundamentals remain not only intact, but also well positioned for growth, as explained in the next section immediately. below.

BABA stock chart

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BABA’s core business remains intact

First of all, I believe that many of the lingering uncertainties, as noted above (the Russian-Ukrainian war, the disruptions due to COVID and the fear of radiation) are only temporary and of little relevance term for BABA’s existing core business. Second, the Chinese government is committed to stabilizing the market and stimulating the economy. And key players like BABA will directly benefit from government support, as evidenced by the sharp rises in share prices soon after these announcements.

In the above context, let’s now look at BABA’s main retail businesses. BABA reported a total of 1.28 billion annual active consumers worldwide for the twelve months ended December 31, 2021. This is an increase of approximately 43 million from the twelve months ended September 30, 2021 This includes 979 million consumers in China and 301 million consumers. overseas, representing a net quarterly increase of over 26 million (2.6%) and 16 million (about 5%), respectively. These growth rates may be lower than its faster pace in the past. However, these are still very healthy growth rates on a BABA scale. And again, the excessive market action has compressed its valuation so much that it is now considered a cheap and stagnant terminally ill company. But the reality is quite the opposite.

BABA annual active consumers

BABA Earnings Report

Looking ahead, I see the company is well positioned for future growth and the fear is exaggerated for a few key considerations. As mentioned above, upon rational examination, many recent developments are not only temporary but also irrelevant or even positive for BABA. For example, in September 2021, BABA pledged 100 billion RMB (equivalent to approximately $15.5 billion or $3.1 billion per year) to China’s common prosperity fund. For me, this is a positive sign as it shows that the Chinese government is working on the way forward for Baba and hints at what a “new normal” for Baba could be. And the recent separation of its China retail business from its international retail business is also a positive development in my view. it has compartmentalized regulatory complications and risks to its core business. BABA is now well positioned to conquer the international market. Cainiao continues to expand its global infrastructure by strengthening its end-to-end logistics capabilities, including ehubs, liner transport, sorting centers and last mile network.

BABA’s other growth opportunities

In addition to its core bread and butter business, BABA is also well positioned to capitalize on its investments in other high-growth, high-margin opportunities, both domestically and internationally. It is in a key strategic position to leverage its local and cross-border supply and global infrastructure in many key areas.

Its cloud segment is one of the highlights. China’s cloud market is expected to grow from RMB 0.2 trillion in 2020 to RMB 1.0 trillion in 2025, a 5x growth in 5 years. BABA’s cloud computing revenue grew 50% year-on-year in its most recent fiscal year (which ended March 31, 2021) despite losing a major customer in the March quarter. Since then, its cloud segment has grown another 20% year-over-year to reach RMB 19.5 billion (US$3.1 billion) in the last quarter. At the same time, its cloud revenue is also diversifying. Sources of revenue were dominated by the Internet industry (around 60%). In the last quarter, the Internet industry’s revenue share declined to around 48%. The solid 20% year-over-year growth reflects robust growth in other key sectors such as the financial and telecommunications industries.

BABA Earnings Report

BABA Earnings Report

Appraisal too cheap to ignore

Munger bought BABA shares on the operating table when it was valued as a terminally cheap company. Valuation is still too cheap to ignore. BABA remains deeply undervalued in terms of all metrics, net earnings, free cash flow and assets. As shown in the table below, it is currently rated at around 12x FW PE. And according to consensus estimates, its valuation at current prices will be in the single-digit range from 2025 and only around 6x by 2028.

At the same time, there is a large cash position on its balance sheet, which makes the valuation even more compressed than on the surface. Currently, about a third of its market capitalization is in its current assets and more than half in its current assets, properties and equity investments. With its China business making over $90 billion in sales annually, the current valuation is equivalent to A) buying its stock at book value, B) paying for its China business operation at approximately 1.6 times sales (Amazon is valued at around 3.5x sales on the other hand), and C) getting all of its other operations for free.

EPS consensus estimates

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Conclusions and risks

This article attempts to reorganize Munger’s thought process surrounding his BABA positions. My opinion is that what happened between the third and fourth quarters of 2021 is another classic illustration of his wisdom to buy bargains off the operating table. And I still maintain this view after DJCO recently reduced BABA’s position. Specifically,

  • My opinion is that as his role at DJCO ends, the trim no longer reflects his point of view. At this point, BABA’s core business remains intact and is well positioned for many high-growth areas, especially its cloud computing and CAINIAO logistics infrastructure.
  • Many current fears (listed below) are overblown or irrelevant to long-term business fundamentals. On the contrary, in the shorter term, BABA’s investment is still protected at this stage by its major share buyback plan and the Chinese government to stabilize the market and its economy. Its $25 billion share buyback plan will reduce the number of shares by almost 9% at its current price. Given its current undervaluation, it will be highly accredited to boost shareholder returns.

Finally, BABA investing involves considerable risk and is certainly not suitable for all investment styles. The main risks as I see them are detailed below.

  • First of all, the great price volatilities. its share price has recently become dominated by market sentiment and disconnected from fundamentals. His stock prices have easily fluctuated more than 30% in a few days or even a single day recently in response to news and sentiment that may or may not have a direct bearing on the fundamentals of his business.
  • Second, the VIE structure risk could result in a 100% loss. The Chinese government could confiscate foreign investments in BABA if it decides that foreign investments made in BABA under the VEI structure are illegal under Chinese law.
  • Third, write-off risk could also result in a substantial loss. This led to a loss of more than 20% after the next few days in DiDi’s recent delisting example.
  • Finally, given the large uncertainties above, potential investors may consider a long call option to limit the risks of total exposure. As detailed in my previous article, I think the market’s perception of its price move is too conservative, leading to a mispricing of its implied volatility.

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