Charlie Munger has just doubled on Alibaba: should investors follow suit?

In a recent regulatory filing, The Daily Journal (NASDAQ: DJCO) revealed he bought more shares of the Chinese giant Ali Baba (NYSE: BABA) with its corporate treasury. The decision is likely the work of Charlie Munger, partner of Warren Buffett and Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) vice-president. Munger is also the chairman of the Daily Journal and owns 3.6% of the company’s shares.

Although The Daily Journal started out as a legal journal and is now developing into a software company for local court systems, it uses its cash to invest in stocks, which are a significant portion of the market capitalization of the business.

While the Daily Journal’s concentrated portfolio consists mostly of large US banks, in the first quarter Munger, a longtime Chinese bull, bought a stake in Alibaba. With that investment going south this summer, the recent Daily Journal disclosure shows Munger nearly doubled his bet as Alibaba’s stock price plummeted.

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Still believe in Baba

In the filing, the Daily Journal revealed that its stake in Alibaba had grown from 165,320 shares at the end of the first quarter to 302,060 shares at the end of the third quarter. That’s an 83% increase – a near doubling of Munger’s stake. The company’s stake in Alibaba now stands at around $ 45 million, or around 20% of the Daily Journal’s portfolio.

It’s been a tough year for Alibaba shares, as shares are down 38.5% on the year and 56.3% from all-time highs in 2020.

BABA chart

BABA data by YCharts

As Munger is a notorious value investor, if he believed Alibaba to be cheap stock in April, when stocks were in the $ 230 to $ 240 per share range, he probably likes it now, the stock currently trading in the $ 140 range. This is a great example of adhering to the famous quote from partner Warren Buffett: “Be fearful when others are greedy, and greedy when others are afraid.” ”

But should you follow Munger in Alibaba?

If you are investing your own money, as a rule of thumb, it is usually best not to blindly follow others in an investment, even if they are famous investors. Famous investors can make mistakes too, and if a trade goes south and you don’t know it Why you own something you can panic and sell at the wrong time.

Alibaba is a fascinating case, of course, because there are many valid reasons for an investor to be both bullish or bearish in these times of great uncertainty.

A woman receives an e-commerce package at her doorstep.

Image source: Getty Images.

The bull deal on BABA: it looks very cheap

On the bullish side, Alibaba is of course a leading player in Chinese e-commerce, payments and fintech, and the cloud. With a strong position in these three high-growth areas, and given that Munger is known to be optimistic about the long-term growth prospects of China and its rising middle class, it seems a safe bet that Alibaba should grow in the years to come. .

So when the IPO of Alibaba’s subsidiary, Ant Financial, was halted by regulators a year ago and its shares fell, Munger intervened by buying shares when the P / E ratio d ‘Alibaba fell to 20. However, Alibaba also had around $ 135 billion in net cash and other investments in other companies at the time, so the’ core ‘business was actually much cheaper than that. And Alibaba also has several promising but loss-making subsidiaries, like its cloud computing platform, which likely has significant positive value but contributes negatively to current profits.

Over the summer, Alibaba’s valuation fell to just 17.3 times earnings. It is extremely cheap, especially given, once again, Alibaba’s lavish liquidity and investment, as well as several loss-making business segments. And even with all the negativity in Alibaba shares today, analysts still believe future growth, albeit more subdued. Based on 2023 estimates, Alibaba is trading at just 13.3 times profit.

Reasons for being bearish: slower growth and increased regulations

However, Munger may have misjudged the extent to which the Chinese Communist Party would continue to punish Alibaba and other Chinese tech companies. After a $ 2.8 billion fine for violating anti-monopoly rules in e-commerce in April, regulators continued to issue regulations on the remuneration of couriers as well as restrictions on data collection, which could largely affect Alibaba’s business portfolio.

The Communist Party is also preparing to divide Ant Financial into three separate companies, thereby overturning the company’s moat against its rivals. Even on the core business, recent regulations could open up Alibaba’s core cash cow e-commerce business to more fierce competition.

In August, its earnings report for the quarter ending in June found that its earnings were low, disappointing some investors. While overall revenue grew 34%, outside of a large acquisition, revenue only grew by 22% – a still solid figure, but a deceleration from Alibaba’s past rate. Recent troubles in Evergrande (OTC: EGRN.F), the big Chinese real estate developer, could further extend to the whole Chinese economy. It could affect the Chinese consumer, which means less purchases and less revenue for Alibaba.

Finally, Alibaba also recently announced a $ 15.5 billion “social equity” fund to address societal challenges such as the well-being of salaried workers, the development of rural areas and the growth of small and medium-sized enterprises. . This fund does not necessarily have a financial benefit, and some may view the fund as a theft or a hidden tax that the Communist Party would likely have “encouraged”.

Finally, relations between the United States and China have been frosty to say the least, and new tensions could lead China to take unilateral action against foreign shareholders of domestic companies. Alibaba is listed in the United States, but due to Chinese rules, non-Chinese shareholders do not directly own shares, but rather shares of a variable interest entity (VIE) listed in the Cayman Islands, which has a right contractual on part of Alibaba’s shares. Business. If things go wrong between the two countries, it is possible – a long shot, but still possible – that China will seek to target the VIE structure and contracts.

Consider these things when looking to buy Alibaba

Munger has long been positive about China’s growth, and it’s safe to say he knows a great deal about the country. However, there are also other smart people with a more pessimistic view of China and its political system.

In buying Alibaba, investors must have confidence that the current regulatory campaign will eventually come to a halt or subside, and that Alibaba will still be able to operate as a relatively normal for-profit company, albeit with more regulations. Obviously, Munger believes that will happen after this period of turmoil, but that is by no means a sure thing.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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