2023-12-11 11:22:50 ET
Summary
- Charlie Munger's final interview with CNBC revealed his thoughts on Alibaba stock.
- Munger described Alibaba as a "pretty good" company despite calling his trade in its shares a mistake.
- Munger's use of the word "mistake" referred to the price he paid, not the company's quality.
- Alibaba stock is currently trading at its lowest multiples in years.
- At the same time, its growth is accelerating. This value/growth combination argues for buying the dip in BABA.
Shortly before his death, value investing legend Charlie Munger gave a final interview with CNBC that waded into many and varied subjects, including:
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Autodidacticism.
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The history of ideas.
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The 1990s sitcom Seinfeld, which Munger called his favorite show.
The interview also briefly touched on Alibaba ( BABA ) stock. Munger did not say a whole lot about BABA, but what he did say was very instructive.
Though he called his Alibaba trade a ‘mistake,’ he nevertheless described the company itself as a ‘pretty good’ one. The full transcript of this segment of the interview can be seen in the image below:
This quote is interesting for many reasons. First, it was the first time we ever heard that Munger bought BABA for the Munger Family, not just for Daily Journal’s ( DJCO ) stock portfolio. Second, it tells us the reason why Munger bought his Alibaba shares. Third and finally, it implies that Munger’s mistake was buying at too high of a price, not the fact that he bought at all: he continued thinking that the company itself was “pretty good” right up until the end.
At this stage in the game, it’s hard not to conclude that Munger’s earliest purchase of BABA shares was too early. When Munger first bought the stock, it was trading at $225. Today, it’s trading at $72.5, so Munger did not buy close to the bottom.
For this reason some investors are perplexed as to why Munger never exited the position. Right up until this year’s third quarter, the Daily Journal recorded Alibaba as a holding in its 13F filings. We don’t know whether Munger kept the block that he bought for his family, but it would be unusual for him to keep the stock in Daily Journal while selling his own. Both portfolios were managed according to Munger’s investment judgment. Munger did sell half of the BABA shares in Daily Journal’s portfolio, but he held the line from that point onward. Perhaps he traded the stock similarly in his family account.
At any rate, the point is that those buying Alibaba stock now are buying it much cheaper–in terms of dollars as well as valuation multiples–than Munger did when he started buying. In fact, the stock’s current price is even lower than it was when Munger averaged down on it.
When I last wrote about Alibaba, I rated the stock a ‘buy,’ on the grounds that it was cheap, profitable and growing, with a solid competitive position. My opinion on Alibaba as a company is much the same now as it was then. However, the stock price is lower now than it was at the time that article was published, despite BABA’s revenue and earnings growth having accelerated. This type of situation demands a re-rate, and in fact, I have revised my opinion about Alibaba to a more bullish one than I held at the time I wrote my previous article. Largely, the facts about Alibaba as a company haven’t changed since I last wrote about it . The valuation most certainly has changed, though, and more information about Munger’s thinking has emerged. For this reason, I’m upgrading my rating on Alibaba stock to strong buy.
‘Smart Money’ Investments in Alibaba
Because I’ve covered Alibaba’s financials and valuation to death in past articles, I will focus on a different set of factors in this one. Namely, Alibaba’s smart money buyers (particularly Munger) and the company’s future prospects. I will also touch on the stock’s valuation briefly, but the main focus of this article will be the two factors just mentioned. For a deep dive on Alibaba’s valuation, check out this article .
Now, on to factor #1: smart money backing.
Alibaba is currently owned by a number of high profile ‘superinvestors,’ including:
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Charlie Munger’s estate (possibly).
I’ll start by reviewing Munger’s trading history in Alibaba, then move on to the other superinvestors who hold the stock.
Charlie Munger’s Alibaba purchases likely occurred at prices between $115 and $225. In 2021, he bought shares that were worth $37.4 million at the end of the first quarter. In the third quarter of that year, he nearly doubled his holdings, increasing the value of the shares to $44 million. In the fourth quarter, he nearly doubled his holdings again, to 602,000 shares worth $77 million. The reason that the dollar value of Munger’s Alibaba holdings did not triple when the share count nearly doubled twice, is because the stock was going down in price as Munger was buying. One quarter after Munger’s largest BABA buy, he cut the position in half.
Broadly, Munger’s trading in Alibaba suggests that he thought the stock was worth holding in 2022 and Q3 2023, just not at the same portfolio weighting he once held it at. Munger did not sell out of the stock, even when it went as low as $60 in 2022. So, Munger’s calling BABA his “worst mistake” doesn’t mean that he thinks the stock is going to zero, it means that he thinks he paid too much for it.
As for BABA’s other smart money backers:
Guy Spier has owned Alibaba since Munger bought it. He has not sold his shares.
Burry and Druckenmiller are more recent buyers of Alibaba stock. I wouldn’t hold my breath that Burry will hang on very long, he is quite prone to selling when positions turn against him. I wasn’t able to find as much information on Druckenmiller’s average holding period, but he is known for having a 30% CAGR 30 year track record. His holding a stock is a pretty major vote of confidence, but in this case we don’t know how long he plans to hold it for.
As the preceding paragraphs demonstrate, many successful investors, including Charlie Munger, have found BABA stock to be worth buying. While this does not constitute an investment thesis in itself, it combined with the profitability, growth and valuation factors I explored in previous articles, corroborates the claim that the stock is undervalued.
Future Prospects
Having explored Alibaba’s ‘smart money’ backing, it’s time to move on to the company’s future prospects.
Here we have some good news and some bad news.
First the bad news:
PDD Holdings’ ( PDD ) Temu and Pinduoduo apps are quite similar to AliExpress and its Chinese equivalent, and are growing quickly. In its most recent quarter, PDD grew its revenue at 94%. Alibaba only grew the top line at 9% . Many market commentators think that PDD is gaining at Alibaba’s expense, and that’s at least partially true. In China, Alibaba does indeed compete head to head with PDD, and is likely missing some sales due to that company’s rise. The situation is different internationally. The scope of competition between BABA and PDD abroad is limited. Alibaba is currently focusing on Europe and Latin America in its global expansion, while PDD is betting heavily on the United States . PDD does not offer a service that competes with Alibaba’s U.S. export business catering to dropshippers and others making bulk orders. Regardless, PDD’s rise is an issue for Alibaba in some markets.
Now the good news:
The newly heightened competition is not preventing Alibaba from growing, or having high margins. Although Alibaba’s growth last quarter was not as high as PDD’s, the company started from a much higher base, and grew faster than China’s overall retail sales did in the same period . This suggests that Alibaba, despite its enormous size, is outgrowing Chinese retailers generally.
The facts above argue for Alibaba having a strong competitive position. That in turn argues for its future prospects being good. A strong competitive position in a growing market tends to produce growth, and the e-commerce market is growing. Market Research Elite estimates that global e-commerce will grow at approximately 13.6% CAGR between 2020 and 2027. The first three years of that period are over, and e-commerce did in fact grow in the period. So, it looks like this forecast, originally given in 2020, is starting to be validated.
Valuation
Finally, we can take a quick look at Alibaba’s valuation. I’ve covered this topic extensively in past articles but it merits a fresh look in light of today’s lower stock price. At today’s price, BABA trades at :
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8 times adjusted earnings.
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10.5 times GAAP earnings.
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1.48 times sales.
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1.3 times book value.
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6.3 times operating cash flow.
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7.5 times free cash flow .
These multiples are all extremely low. Additionally, the company’s $9.5 worth of free cash flow per share provides a discounted cash flow valuation of $95 under the assumption of 0% growth and a 10% discount rate. This is an extremely conservative estimate: Alibaba’s earnings actually grew very rapidly in the trailing 12 month period.
Conclusion
Why did Charlie Munger continue holding his Alibaba stock even though he had lost so much money on it? As the preceding paragraphs show, it’s because at today’s prices, the company is very cheap. Buying a stock at a high price does not mean you should sell at a low one. If it's a high quality company, you should welcome the opportunity to buy it more cheaply than before.
Alibaba has enough cash and earnings power to return enormous amounts of wealth to investors. The company just started paying a dividend and it earns enough in free cash flow to do $20 billion in buybacks each and every year even after subtracting the amount paid out in dividends. The current valuation implies that investors think the company is going to shrink, yet it just keeps putting out earnings releases showing strong positive growth quarter after quarter. Yes, U.S./China tension over Taiwan and chips is a risk, but it’s just as big a risk for Apple ( AAPL ), and people aren’t selling that stock. Day traders will continue to fret over Alibaba’s ugly chart, but as the saying goes, past returns do not predict future returns. Alibaba stock is currently the best value it has been since October of 2022. I plan on buying more.
For further details see:
Alibaba: Charlie Munger's Last Buy Is Dirt Cheap