Charlie Munger, the longtime partner of Warren Buffett, has just revealed his stake in Alibaba through Daily Journal Corporation. In today’s Alibaba stock analysis, we will discuss why Munger invested in the company based on its latest earnings performance.
Source: Markets Insider / Charlie Munger’s Daily Journal reveals an Alibaba stake worth $37 million
Source: Yahoo Finance / Alibaba Group Holding Limited Share Price 1 Year Chart
It is interesting to see that. Back in Dec 2020, Alibaba’s share price plummeted due to its Ant Group failed IPO. And there were all the antitrust issues as well. So I loaded some of its shares back then. And added more when it corrected again recently, after recovering slightly from the lows during late last year.
Having a value investor like Munger picking the same company is reassuring 🙂
Just a little bit of history. Aside from Berkshire Hathaway, which Munger is the Vice Chairman alongside Buffett, Munger is also the chairman of Daily Journal.
Before we move go to Alibaba stock analysis proper, let’s take a look at Munger’s story with Daily Journal first.
History of Daily Journal
Munger’s relationship with Daily Journal dates back a long time ago, when he was still running his over investment fund. Back then he bought the company for US$2.5 million. After dissolving his fund, he still owned about 3.6% of the company.
Well, Daily Journal isn’t an investment company. Its primary business is in the publishing of newspapers. With roots in the legal world, the company also offers case management software systems and related products serving the courts, prosecutor and public defender offices, just to name some.
But Munger’s involvement has reshaped the company with his ability to allocate capital efficiently. In the process, it generated returns to their shareholders that may otherwise not be possible.
Munger’s Transformation of Daily Journal Corporation
Back in the 2008 financial crisis, Munger plowed US$20 million worth of Daily Journal’s cash largely into four companies. He invested the cash in Wells Fargo, Bank of America, U.S. Bancorp, and Posco.
Data Source: The Daily Journal’s Annual Reports / Adapted from The Motley Fool – The Daily Journal’s Total Assets
Since then, their stock prices have more than 4X the size of the company’s balance sheet. Take a look at the chart above. Its securities assets now take up more than half of Daily Journal’s total assets, which was once non-existent.
Data Source: The Daily Journal’s Annual Reports / Adapted from The Motley Fool – The Daily Journal’s Dividend Income
In addition, with the high quality investment portfolio, its dividend income has been expanding as well. The dividends received are contributing more and more to Daily Journal’s bottom line. This represented an increasing contribution as a percentage to its revenue over the years.
Why I’m bringing up all these is to share with you about Munger’s track record in allocating capital profitably, apart from the shared success with Buffett in Berkshire Hathaway.
So, investing in Alibaba recently tells us something that Munger sees in the company. And this brings us to our main topic of why Munger invested in Alibaba.
Alibaba Stock Analysis: Munger’s Stake
This is not the first time that Munger has ventured into Chinese companies.
In fact, he was the one who brought BYD to Buffett’s attention previously in 2008. This resulted in Berkshire’s US$230 million investment into the electric-vehicle company. And this has become a stake worth more than US$5 billion today.
Then again, it is interesting for Munger to take a position in Alibaba. Because, he had negative views on the company’s founder for criticizing the Chinese authority previously.
During the Daily Journal annual meeting in February this year, Munger commented that “Jack Ma was very arrogant to be telling the Chinese government how dumb they were and how stupid their policies were and so forth. Considering their system, this is not what he should have been doing.”
Source: Dataroma / Charlie Munger – Daily Journal Corp. Holdings 31 Mar 2021
Therefore, Munger’s recent US$37 million purchase of Alibaba does shed some light on the value he sees in the company.
This stake may not be a lot compared to Berkshire’s usual size of investments. But it made up 19% of the Daily Journal’s investment portfolio. And its portfolio holds only five stocks worth about US$200 million currently.
Alibaba Stock Analysis: Valuation
Well, we will not go through Alibaba’s business here. If you want to have a better understanding of its business and operations, check out the article here that we have done a more thorough review on.
For now, we think that the company is still trading at an attractive value. Compared to other tech giants in the U.S like Facebook, Amazon, Apple, Netflix and Google, Alibaba is trading at a cheaper valuation.
It is only trading at about 25 times trailing twelve months earnings. This is much lower than its peers in the U.S.
Source: Yahoo Finance / Alibaba Group Holding Limited Statistics
In fact, Alibaba’s forward P/E, based on 2021 earnings estimates, is only 19. This makes the stock very attractive, given the company’s business is still experiencing strong growth alongside the tailwind of a growing middle class in China.
Here we want to highlight why it is trading at such a relatively low valuation compared to its U.S counterparts. This is mainly due to 3 reasons.
First, will be the antitrust issues that the Chinese authorities have been clamping on recently. Second, concerns related to its failed IPO (Ant Group), associated with new regulatory requirements, is still lingering among the investment community. And thirdly, the increased competition that we saw from other ecommerce players like JD.com and the rising star Pinduoduo, have definitely held some investors back on concerns of Alibaba’s ability to protect its business.
So, negative sentiments brought about by these events seem to present a window of opportunity for value investors like Munger.
Alibaba Stock Analysis: Strong Balance Sheet
But Munger may actually find more value in Alibaba’s business than the surface valuation suggests.
First, the company has a very strong balance sheet as of the end of 2020.
Source: Alibaba Quarterly Results December 2020 / Consolidated Balance Sheets – Assets
For its cash and short-term investments, the company holds US$48 billion and US$22 billion worth of them respectively. This far exceeds its debt level of about US$20 billion.
And we haven’t talked about how much its investment portfolio of listed and private companies is worth. They are valued at US$37 billion and US$28 billion respectively currently.
Key Growth Drivers
But the real gems lie in Alibaba’s continually expanding portfolio. The group has a few key growth drivers that could substantially add-on to the its earnings soon.
Source: Alibaba / March Quarter 2020 and Full FY2020 Results – FY2020 Segment Reporting
Understand that the group’s key profit driver lies in its Core Commerce operating segment. The rest of the segments are still in the red. Basically its Cloud Computing, Digital Media & Entertainment, as well as Innovation Initiatives & Others segments are still unprofitable at the moment.
Source: Alibaba Quarterly Results December 2020 / Adjusted EBITA 9 Months ended Dec 2020
Even within its Core Commerce segment, the company is still investing heavily in operations that are incurring losses, such as its Local Consumer Services, international ecommerce business Lazada, New Retail and Direct Import, as well as its Logistics business under its Cainiao networks.
These losses worked out to be about RMB 16 billion for the nine months that ended on December 31, 2020. In terms of US dollars, this will be about US$2.4 billion of losses. Without investing in these growth opportunities, this could add on to the earnings for the group, and make Alibaba’s valuation seem even cheaper.
Source: Alibaba Quarterly Results December 2020 / Revenue 9 Months ended Dec 2020
More importantly, observe the results for the nine months that ended on Dec 31, 2020. Its Core Commerce segment continued to grow very quickly at 34% year-on-year.
And the other gem lies in Alibaba’s Cloud Computing business, which holds a dominant market share in China. This segment continues to grow very strongly, registering 56% year-on-year growth in revenue. Once it achieves scale and becomes profitable, it can spur up the group’s bottom line significantly. Just like how the cloud business now accounts for more than half of Amazon’s profit.
Alibaba Stock Analysis: Short-Term Pessimism or Risk
Source: Alibaba Quarterly Results December 2020 / Revenue Contribution By Segments (Nine months ended December 31, 2020)
With such strong growth history and positive prospects for Alibaba, its current share price does look like a good deal.
However, that’s provided if you can handle the risks associated with investing in Chineses stocks that we have briefly mentioned. And that’s on top of the continued tensions between the two economic powerhouses – U.S and China.
So, whether it’s a shortsighted sell-off to take advantage of, or a risk that investors should avoid, that’s for you to decide.
Well, at least for now, it does seem that Munger is leaning towards the opportunistic side of the equation. He is probably thinking that this short-term pessimism in the market provides him a window of opportunity.
If he turns out to be right in the long run, then Daily Journal will have itself another multibagger in its portfolio.
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