Alibaba recently lit up the value investing world because Charlie Munger and Mohnish Pabrai recently bought BABA in Q1 2021. I discuss what I’ve learned so far and Margin of Safety prices I’ve calculated to see if it’s on sale!
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The stock’s ticker symbol is BABA and it is listed on NYSE as a VIE ADR. It’s been on a downtrend since Jack Ma gave a controversial speech in late October 2020 and it’s around $100 off its high of $317. This company could be going through an event as a result and perhaps it is on sale and why Munger, Pabrai, another super investor Greg Alexander all bought it per the latest 13F filings for Q1 2021.
I discuss some of Alibaba’s attributes in the context of Charlie Munger’s simple investing principles, and which have been categorized by Phil Town as the 4 Ms: 1) meaning, 2) moat, 3) management, and 4) margin of safety.
Jack Ma is a former Alibaba founder and Daniel Zhang has been its CEO Since 2015. This massive conglomerate company and its subsidiaries and affiliates seem to mean a lot of things to hundreds of millions of people in China and in other regions.
Part of what may have catalyzed the current downtrend of Alibaba may have been the failed IPO of Ant Group, which Jack Ma also founded because there were new regulations that basically stopped the IPO in November 2020. Charlie Munger said at the February 2021 Daily Journal Corporation (DJCO) that Jack Ma should not have been criticizing the Chinese financial regulatory system.
There’s still a lot of homework I need to do to better understand Alibaba’s meaning, moat, and management, but it appears to me that it has functions that are similar to Amazon, AWS, Google, Youtube, Apple, ebay, and more. It’s important to evaluate all of its businesses in commerce, digital media/entertainment, innovation, consumer services, financial services, and cloud infrastructure, for example. And if its financial performance can give us clues about whether it has a durable, competitive advantage.
Charlie shared a statement to Barron’s in how he prefers DJCO to hold BABA because it needs to hold cash equivalent securities. Normally a common stock wouldn’t be good at serving this role, but because interest rates have been so low making US Treasury Bills unattractive and because he thinks the long term prospects for the Alibaba stock are good, he is willing to have DJCO own $37M of BABA.
While Charlie has been bullish on China for a long time, he was suspicious and skeptical about investing in overseas companies in a Variable Interest Entity (VIE) structure. Though he seems to be comfortable with investing in them now! But it’s still important to understand the risks in investing in VIEs and/or American Depositary Receipts (ADRs) overseas stocks. Like Charlie Munger says: “Invert, always invert” to figure out reasons to NOT buy a company.
I also try to get a better grip on meaning and moat by reading various articles to understand various perspectives. I found one comment on a Seeking Alpha article particularly salient where this person said that Alibaba is creating value and making people’s lives more convenient across various services and products. It helps me to understand how much meaning Alibaba might have to a lot of people.
Finally, it’s important to try to figure out if the super investors bought Alibaba at a Margin of Safety (MOS) price, or a price that makes sense and gives us a MOS or buffer in case the investing thesis isn’t entirely correct. I’ve learned to ideally aim for a 50% discount to get a MOS on what one believes a business is truly worth or its intrinsic value.
I grabbed some data from Gurufocus and the SEC filings to figure out valuations: 1) MOS price, 2) Payback Time price, and 3) Owner Earnings / 10 Cap price. These may not be necessarily the best numbers to have used, but I just tried to be a little bit conservative with my projections.
It turns out that the legendary investors Munger and Pabrai seemed to have purchased BABA at prices (maybe in the $220 range) that seem to be close to the margin of safety and related valuation prices! With the price hovering around $212, this company might be on sale.
To me, this seems OK to have as a small portion of a “risky biz” portfolio, the idea of which I credit to Phil Town. And Mohnish Pabrai encourages people to be shameless cloners of the best investors, so who knows if Charlie gave Mohnish a tip that he was going to buy into this same company but coincidentally they both did! But it would be a pretty big warning signal if they ever sold out of their positions.
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