Many investors follow Warren Buffett’s every move, but many also pay close attention to his longtime partner and Berkshire hathaway (NYSE: BRK.A) (NYSE: BRK.B) Vice Chairman Charlie Munger. Munger, 97, is still active in the investment world, not only through his Berkshire activities, but also as chairman of the board. Daily Journal Corporation (NASDAQ: DJCO)…
Munger bought the Daily Journal decades ago, when he was still running his own private equity fund, for just $ 2.5 million. After his fund disintegrated, Munger distributed shares to his partners, but he still owns roughly 3.6% of the company, which is now valued at a whopping $ 455 million.
One interesting feature of the Daily Journal, which historically ran a legal newspaper and recently started selling court software, is that it takes cash flows from its core businesses and reinvests it in stocks, mostly in large American banks.
Munger and company turned their heads this week when the Daily Journal revealed a $ 37 million stake in the Chinese e-commerce giant. Alibaba Group Holding (NYSE: BABA), accounts for 19% of the company’s stock portfolio, making it the third largest position in the company after Bank of America and Wells Fargo…
Is Alibaba Really Munger Style Securities? And should you follow him to the Chinese giant?
Case for Alibaba as a security
Alibaba’s stock has dropped somewhat recently despite strong performance, so it shouldn’t come as a surprise that Munger might have thought the company had a good value at today’s prices. The recent controversy surrounding founder Jack Ma and the disrupted IPO of Ant Financial, a third of which is owned by Alibaba, may have played a role. Antitrust issues in China have become an additional obstacle. In addition, Alibaba faces fierce e-commerce competition from JD.com as well as explosive discount upstarts Pinduoduo…
However, Buffett once joked, “You pay a high price for a happy consensus.” Amid these concerns, Alibaba is trading about 25 times its estimated earnings and 19 times less than its forecast earnings this year. That’s a lot cheaper than all FAANG shares in the US, which is surprising given Alibaba’s still strong growth and a growing middle class in China.
But Alibaba might even be cheaper
As with several big tech conglomerates, Munger may be looking at different parts of Alibaba’s sprawling empire and may have realized that these parts add up to a lot more than Alibaba’s current market value.
First, Alibaba has a significant amount of cash on its balance sheet, as well as large stakes in private companies such as the Ant Group, as well as in public companies. As of December 31, 2021, its balance sheet included $ 47.8 billion in cash, $ 22.1 billion in short-term securities, $ 36.8 billion in other publicly traded equity securities, and another $ 28.4 billion. The United States as equity investments such as the Ant Group. These assets total $ 135.1 billion against an estimated $ 18 billion in short-term and long-term debt.
So while Alibaba’s market capitalization is currently about $ 615 billion, it is actually only about $ 500 billion when these net assets are excluded. That’s very cheap compared to Alibaba’s current operating income of $ 14.9 billion in the first nine months of fiscal 2021, which is nearly $ 20 billion.
However, even this measure of operating profit may underestimate Alibaba’s true profitability. This is because the company is aggressively investing large cash flows from its main e-commerce platform in other parts of its business. In fact, Alibaba is losing out on a large number of its fast-growing businesses, including the local consumer services business, the logistics arm of Cainiao, the Southeast Asia e-commerce firm Lazada Group, and its cloud computing and digital entertainment business. Over the past nine months, these cumulative losses have reduced real operating income by about $ 5 billion, although these units are likely to have a significant positive value.
This all adds up to a bargain, according to Munger.
Alibaba’s core operating income from e-commerce can be said to have been nearly $ 20 billion in the nine months ended December, corresponding to an annual sales rate of about $ 26 billion. At a cost of $ 500 billion, that’s less than 20 times EBIT. And that’s for a company whose revenue grew 37% last quarter. This seems like a pretty good deal.
One reason for optimism is Alibaba’s cloud computing division. Cloud computing revenue grew 50% last quarter and the division just posted positive adjusted EBITA in the first quarter. Most believe the cloud is at a relatively early stage, especially in China, so this division is likely to have significant value in the future, which has not yet affected the company’s overall operating profit.
Alibaba looks like a good deal if you can handle Chinese risks
Overall, Alibaba shares look very expensive if investors can manage the Chinese risks. It should be noted that the Securities and Exchange Commission has just passed a rule that Chinese companies registered in the United States must be audited by the US tax authorities and also disclose membership of the Communist Party. As a result, some Chinese securities were selling amid fears of further tensions between the US and China.
However, Munger is a famous bull in China. He might think these headlines are more dire than business reality. If this turns out to be true, he and the Daily Journal may indeed have struck a deal with Alibaba stock.
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