Charlie Munger loads up on Alibaba Stock!

Holy smokes, guys! This is pretty crazy. Charlie Munger has just released the 13F4 for the Daily Journal Corp, and he is buying more Alibaba. Honestly, I shouldn't be surprised by this, but I am. The reason is because he first bought Alibaba back in Q1 2021, somewhere between 220 and 270. But then, in Q2, the price got as low as 206, but he didn't add to his position.

Now, at the time, I found this pretty confusing, to be honest. I thought maybe he was just making a small investment, you know, 165,000 ADRs occupying 19% of his U.S. portfolio. Maybe that's all he wanted. Q2 sailed by, no change. But now, in Q3 2021, he has increased his holdings by 82%, buying another 136,000 ADRs. So he is seriously sinking his teeth into Alibaba now, which honestly is really exciting, considering Charlie is, you know, one of the masters of just doing nothing.

Before Alibaba, he hadn't touched his portfolio since 2014. But while I didn't expect it, it does make sense. In Q3, Alibaba's share price continued to fall from 221 to 148 dollars. So if he bought somewhere between 220 and 270 originally, this potentially represents a very large discount even where he was originally buying.

So you think about the additional margin of safety he's now getting if his original bet was somewhere between 220 and 270. Yes, definitely, Charlie Munger is making a big statement. Baba is falling, and he wants in. So in this video, we're going to discuss why he's bullish on Alibaba and continues to buy despite all of the issues we're currently seeing in the media. So let's get stuck into it.

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So it doesn't take a genius to come up with some bullish dot points on why you might want to invest in Alibaba. I mean, number one, the company is growing very quickly. Number two, it has multiple fat moats. And number three, it is dirt cheap.

So point one: growth. Have a look at these numbers. Ten-year compound annual growth rate of revenue, free cash flow, and earnings per share—they all sit around 60%. That's mega! They recently posted double-digit year-over-year revenue growth in every single area of their business. They have 1.18 billion global annual active customers, and they're aiming to grow that to 2 billion by 2036. So it's definitely growing, and it's growing quickly.

That's point number one. Then point number two: massive moats. Alibaba's main moat is called the Iron Triangle—a combination of Alipay for payments, Sayanya for logistics, and then that fee together they feed the network effects of Taobao and Tmall. Then, secondly, you also have a big barrier to entry moat, as it's incredibly hard for international players to penetrate the Chinese market trying to do what Alibaba does.

Finally, point three: valuation. Yes, Alibaba is very cheap. For example, Alibaba has three core parts of their business: e-commerce, cloud, and their one-third stake in Ant Financial. Now, we don't actually know the value of Ant Financial, and at the moment, you know, their cloud business basically breaks even—it doesn't really add any profit.

But get this: if you run a discounted cash flow on just their e-commerce business, it still looks incredibly cheap. Then it's like, you know, whatever the cloud business and Alipay are worth or what they could be worth in the future, you kind of just get those chucked in as freebies. So, honestly, there isn't any doubt in my mind that there is a lot of future upside.

However, the reason Alibaba's share prices continue to fall and the market is hesitant to price the company accurately is because of the potential downsides, and that's what I want to focus a lot more on in this video. The biggest question mark that lies over Alibaba is, of course, the Chinese government. For example, they blocked the IPO of Ant Financial; they’re now looking to break it up.

They have fairly recently slapped a big anti-trust fine on Alibaba, and they've kind of just forced Alibaba to make a sizable donation to common prosperity. Sounds bad, right? And this is where it gets tricky. Most Westerners look at this and what they're hearing in the media, and they get very jumpy when it comes to making any investments in Chinese businesses.

But when you actually take the time and listen to experienced investors like Charlie Munger and Ray Dalio, who have investments there and have taken the time to understand the economic and political dynamics in China, you realize that the Chinese government is not the big, bad business destroyer that it is made out to be.

Take a listen to this:

"The Daily Journal recently bought a large position in Alibaba after founder Jack Ma had been reprimanded by the Chinese Communist Party, and Ma's other company, Ant, was not allowed to proceed with its IPO. What are your current thoughts on China and whether the communist leaders will allow businesses with strong leadership to flourish in decades to come?"

"Well, I think that the Chinese government will allow businesses to flourish. It was one of the most remarkable things that ever happened in the history of the world when a bunch of committed communists just looked at the prosperity of places like Singapore and said, 'The hell with this, we're not going to stay here in poverty. We're going to copy what works.' And they changed communism. They just accepted Adam Smith and added it to their communism. And now we have communism with Chinese characteristics, which is China with a free market, with a bunch of billionaires and so forth. They made that shift, and they deserve a lot of credit.

Warren and I are not quite as good at that as changing our minds in many cases, and that was a remarkable change coming from such a place. And, of course, it's worked like gangbusters. It had this enormous growth in the average income of the average Chinese. They've lifted 800 million people out of poverty fast, and there's never been anything like it in the history of the world. So my hat is off to the Chinese, and I think they will continue to allow people to make money. They've learned it works.

The Chinese, I love what the guy said in the first place: 'I don't care whether the cat is black or white as long as it catches mice.' That's my kind of talk. In that list of the twenty most valuable companies, just three are Chinese. Now, if you're looking out thirty years, you know, Mama, do you think it'll be Chinese? My guess is more, but I don't think it'll top the United States. But who knows? It's amazing what has been accomplished. And, yeah, really amazing! They found what works.

I mean, there's nothing like finding something that works in order to sort of reinforce ideas over time. And we'll see what happens."

I find that clip really interesting. Charlie is essentially saying, you know, the Chinese government is not stupid. Yes, it's the Chinese Communist Party, and yes, they believe first and foremost in, you know, common prosperity. But if they find a better economic system to help them achieve their goals, of course, they're going to adopt it. As Charlie puts it, it's communism with Chinese characteristics.

Right? For example, Xi Jinping is opening a new stock market in China for small to medium enterprises, so they can access capital through the public market to grow and flourish. Yes, overall, it's still a way different environment from what we have here. You know, the Chinese government's number one goal is common prosperity, so they will block education companies that charge exorbitant fees. Yes, they will force the biggest companies to make donations to improve society.

But in the long term, they're certainly not looking to inhibit business generally. They are trying to make it flourish, but they're doing it in a way that still fits with their grander objectives. I think there's a tendency, and an understandable tendency, to think because they are Maoist and capital and communist that they're going to go back to that kind of thing. They're not.

Deng Xiaoping, excuse me, Xi Jinping, just for example, introduced the newest stock market in Beijing. He made a point of being the one who introduced the market in Beijing to the small and medium-sized enterprises. They know that it catches mice, and so the issue is that the capitalist is not in control. The issue is that there's a system for the whole system, and then what they want to do is make sure that it's not a capitalist-driven system.

So, Ray kind of just backs up that line of thinking in that clip. You know, China is different, but they are not going back to the old methods that were less effective than the direction they're currently traveling. That would just be silly. Yes, Alibaba may have to make donations in the future. They may have to change their business to be less monopolistic. They may have to restructure Alipay.

These are all risks, but the Chinese government is not trying to kill them off, like what it's made out to be in the media. You know, if Alibaba wins, then China wins too! And because all this negative media has sent the share price down so far, I think Charlie simply sees an event—a short-term event—that has created an opportunity to buy a great business at a very cheap price, which has really good long-term prospects.

Like if you were thinking of holding Alibaba for a few months or a year, then fair enough, you would not want to touch it. No way, just steer clear. But remember, despite being 97 years old, Charlie Munger's investing time horizon is decades. And while unfortunately, he hasn't commented specifically on why he holds Alibaba, I think his line of thinking would be very similar to what Monash Pabrai says in this clip.

"I think Alibaba is a crown jewel for China, just like Tencent is the crown jewel for them, so I don't think they will want to do things that kill the golden goose, if you will. My take is they've extracted their pound of flesh, and they've sent a pretty clear message who's in charge. So I don't really expect much more than what we've seen already. Also, the other thing with Alibaba is that in the long term, I think a lot of the value creation for them is cloud, which is non-existent from an earnings perspective today. You know, they have some scale, but, I mean, they're the number one player, but I think that when you look at Amazon's numbers, Amazon's numbers with cloud are somewhat misleading because they dumped their internal cloud expense in there.

So actually, you know, 50 million, 50 billion revenue and 15 million, 15 billion net income is actually understated. So I think they're making more than 15 on that because they're growing as well. You know, they're investing in all the future growth. So the cloud margins are incredible, and the issue with the cloud is that very few people can play. I mean, in the U.S., the game is for the most part over. You know, you've got the players, and it'll be hard to even see them changing the position they're in.

So while I don't think Charlie would talk much about cloud computing like Monash did there, I think his line of thinking would pretty much be the same. You know, the Chinese government will remind Alibaba that they're in charge, but if they fall in line, then they won't want to unnecessarily inhibit their business. So because that's the case, you now have a great growing business with a big wide moat that's very cheap and getting cheaper because of the catastrophizing of the Western media.

But overall, that's my perspective anyway. Obviously, it's also the perspective of these big super investors. And as always, don't, you know, take this on as financial advice because it most certainly is not. Also, full disclosure, I do hold shares in Alibaba, so who knows? Maybe this whole video is a lie and I'm running my own pump and dump scheme—scandalous!

But anyway, guys, I hope you did enjoy the video. Of course, leave a like if you did. Subscribe for more. You know, check out New Money Clips for even more short-form content. You know, profit falls down in the description below if you want to learn how I go about my investing. But that will just about do us for today, guys. I hope you enjoyed the video.

I'd love to hear what your thoughts and opinions are. The one thing I would say is it's important to not a hundred percent go with everything you hear in the media, and there definitely is merit in listening to experienced investors that do have decades and decades of experience investing in China. So, but still, you know, if your opinion is that you are, you know, you wouldn't touch China or Chinese businesses with a 10-foot pole, you know, let me know about it. Let me know down in the comment section below.

But that will just about do us for today, guys. Thank you very much for watching. I'll see you guys next time.

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