Why Munger’s Unfazed
Charlie Munger’s no stranger to going against the crowd. He’s outperformed the market for the better part of the past century. In 2009, when the rest of the world was frozen in fear, Charlie Munger was buying bank stocks at the bottom tick. A testament to Munger’s uncanny ability to see the future, he also bought into BYD (OTCPK:BYDDF, OTCPK:BYDDY), the electric car manufacturer, around the same time. The investment has since delivered returns of more than 1000% for Daily Journal (DJCO) and Berkshire Hathaway (BRK.A, BRK.B).
Since the great financial crisis, Munger hasn’t bought a thing. That is, until now. Munger’s going against the crowd once again, doubling down on Alibaba Group Holding (NYSE: BABY, OTCPK:BABAF). At 98 years old, Alibaba could be Munger’s last big bet, and his legacy hangs in the balance:
Munger cut his position by 50% in Q1 2022, and many thought he was reversing course. Turns out, he wasn’t. His latest 13F filing reveals zero changes to the portfolio. It appears he was simply tax-loss harvesting after reducing his cost base in previous quarters.
Chinese stocks are hated, just as US stocks were in 1974 and 2009. For contrarian investors, hated assets present an opportunity. In the decade ahead, we project returns of 20% per annum for BABA.
Our Message To Management
We have one message we’d like to convey to Alibaba’s management: buy back all the shares. Over the past 10 years, share buybacks have sent deep-moat stocks like Mastercard (MA) and Apple (AAPL) soaring. Buybacks have an uncanny effect on share prices as a result of the following:
- They create a share shortage
- They increase EPS
- They send returns on equity soaring
On share buybacks, Charlie Munger once told famed investor Mohnish Pabrai, “Pay attention to the cannibals.” Mohnish elaborated:
“What he meant by ‘look at the cannibals’ is look carefully at the businesses that are buying back huge amounts of their stock.”
Alibaba is uniquely positioned with $40 billion of excess cash on its balance sheet and organically growing free cash flow. The company has the ability to buy back stock like crazy, and this is already underway. Alibaba’s outstanding shares are in steep decline, with the company authorizing a $25 billion buyback program, representing nearly 10% of its market cap.
An Asset-Light Growth Machine
Alibaba essentially aims to develop and acquire businesses that have strong industry tailwinds, allowing for rapid growth with minimal re-investment. This leaves shareholders with enormous cash flows and a world-class balance sheet.
Almost every business Alibaba’s in is a business of the future. While co-founder Jack Ma has his flaws, he’s an outstanding visionary and positioned the company well during his tenure. It helps that Alibaba’s largest shareholder, Masayoshi Son, from SoftBank, is an incredible visionary himself. Masa Son has discussed his vision of the future, in which self-driving vehicles will deliver Alibaba’s packaged goods right to your doorstep. Masa is also a permabull on AI
Alibaba has robots running its Cainiao warehouses, but most of the company’s shipping is handled by 3rd parties, making Alibaba an asset-light e-commerce platform. Alibaba makes money by providing small and large businesses with ads and other digital services. And, the company offers premium subscriptions to its Taobao members. Aside from its flagship e-commerce platforms, Alibaba is involved in businesses like cloud computing, new retail, and digital payments.
The global cloud market is expected to grow at 16% per annum through to 2030, but it could grow even faster in Asia; the continent is still in the early stages of cloud adoption. Alibaba Cloud is expanding and building data centers in Thailand and South Korea. The company’s cloud segment recently reached profitability and should contribute to the bottom line going forward.
The Valuation Offers Enormous Returns
Alibaba stock has been hammered and is incredibly cheap regardless of how you look at it:
BABA trades at a forward P/E of just 11.5 according to Yahoo Finance. This implies earnings of around $24 billion in the coming year.
We expect upward revisions in the near future. The current net income is not representative of the company’s true earnings. Alibaba experienced several one-off hits in the past 12 months, including a $2.8 billion fine from the government, increased ad spend on Taobao deals, and huge goodwill write-downs. All of this will dissipate in the years ahead, and Alibaba’s earnings should resume their robust growth trajectory. Despite the poor economic conditions in China, Alibaba reported outstanding year-over-year revenue growth of 19%.
It’s exceptionally difficult to forecast the future, but it won’t stop us from trying. We’ve analyzed the industries, potential margins, revenue growth, strengths, and weaknesses of Alibaba’s business segments. This is our estimate of the company’s 2032 earnings by segment:
|China Commerce||$35.0 Billion|
|International Commerce||$6.0 Billion|
|Local Consumer Services||$2.0 Billion|
|Digital Media And Entertainment||$0.5 Billion|
Equity Method Investing
Innovation Initiatives And Others
|Alibaba’s 2032 Earnings By Segment (Estimate)|
Our 2032 price target for Alibaba is $617 per share, implying returns of 20% per annum.
- We’ve assumed Alibaba will buy back shares at roughly 3.0% per annum. If the stock stays this cheap, the company could buy back even more. But, Alibaba will also need to reinvest to defend its turf against the likes of JD.com (JD), Pinduoduo (PDD), Sea Limited (SE), Tencent (OTCPK:TCEHY, OTCPK:TCTZF), and Amazon (AMZN) . With 2 billion shares outstanding in 2032, we get earnings per share of $35.25. We’ve assigned a terminal multiple of 17.5x.
Risks To Consider
The risks for Alibaba have been extremely well documented, which is why the company’s share price is so depressed. If you’re a new investor in Alibaba, here are a few things to consider:
- The ongoing regulation from the Chinese government – Ironically, companies like Google (GOOG, GOOGL), Apple, and Meta (META) are now facing similar anti-monopoly and data privacy regulations from the United States and Europe.
- VIE ownership – From our understanding, this means you own the profits contractually.
- Geopolitical and delisting risk – The United States threatened to delist Chinese firms if they refuse to be audited by US officials. Alibaba’s already audited by a global firm and plans to comply. In the event of delisting, your shares would trade over-the-counter like Tencent. Alibaba has a secondary listing in Hong Kong, which may become a dual primary listing, opening up the investor base to Mainland China.
Alibaba is perhaps our favorite investment globally. Of course, outsized returns never come easily. As terrible stories swirl, this is a deeply contrarian investment. Even down 70% from its highs, the original thesis appears intact. We think the company will earn $70 billion by 2032, and boost EPS further via buybacks. Alibaba grew its revenue 19% year-over-year in what was a brutal macro environment. In the decade ahead, we estimate your patience will be rewarded with returns of 20% per annum. Munger’s still bullish. Are you?