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Charlie Munger just doubled his position in Alibaba. Is it time to buy?

Opdateret: 3. maj


2021 has been a tough year for Alibaba. It all started in the end of 2020 with the postponed Ant IPO, and since then we have seen several new regulations in China, a fear of Alibaba and other Chinese companies being delisted from the U.S. stock exchange, rumors that the VIE structure would be banned and a whole lot of negative sentiment. Yet, Charlie Munger has just doubled his position.


This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.


For full disclosure, I should mention that Alibaba is my largest position and has been for a while. I will try to stay unbiased through the analysis, but you should be aware that a large chunk of my portfolio is invested in Alibaba. Furthermore, Alibaba is a huge company with all sorts of business. Hence, it won't be possible to get into every part of their business, as the analysis will end up being too long. So, if there are parts of Alibaba that you really like that I don't touch upon, I apologize in advance.


Alibaba is described as a Chinese multinational technology company. It was founded in 1999 by Jack Ma and 17 other people and started as an online platform to help Chinese small businesses and exporters find business opportunities in the world. It has still grown to be a very large company that is probably mostly known for their e-commerce, while they also have other sorts of businesses. The vast number of businesses makes it overwhelming to even start to understand the business, and even more to write an analysis. Luckily, Alibaba segmented all their businesses into five different segments at the last investor days. These segments are China Commerce, International Commerce, Local Consumer Services, Cainiao (logistics) and Cloud. Alibaba is most known for their Chinese Commerce sector, which includes Taobao and Tmall, which is also what gives Alibaba their brand moat. Nevertheless, they are also known for their cloud business, where they are the third largest in the world. I will investigate some of the segments later in this analysis.


Their CEO is Daniel Zhang. He became the CEO in 2015 but has been part of the Alibaba Group since 2007, where he became the CFO of Taobao. Prior to joining Alibaba, he served as a CFO at a Chinese online game developer and operator called Shanda Interactive Entertainment Limited that was then listed on Nasdaq. Besides being the CEO and Chairman of Alibaba, he also serves on the board of Weibo. He is educated from Shanghai University of Finance and Economics, where he received a bachelor's degree. He is credited for being the one responsible for turning Singles' Day into a 24-hour shopping festival, which he did a very good job on, as it is now the largest physical retail and online shopping day in the world. When asked about his thoughts on leadership and his own experiences in switching from being a CFO to CEO, he mentioned some interesting observations, saying that as a CEO you sometimes need to make imperfect decisions as in the world of innovations not everything is accountable. He also mentions that in his role as a CEO of Alibaba, he cannot do everything himself, so he needs to enable his partners to become better leaders, let them assemble their teams and make their own imperfect decisions. Furthermore, when previously asked what define a good leader, it isn't about technical competency, as it is a basic requirement. Instead, what define a good later is wanting other people to be better than yourself. Personally, I really like his modern take on leadership, and combined with his credentials, I have faith in Daniel Zhang being able to move Alibaba forward.


I believe that Alibaba has a brand moat. I also regard the management highly and believe they will grow Alibaba moving forward. Now, let us investigate the big five numbers to see if Alibaba lives up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.


The first and most important number we will investigate is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. Alibaba lives up to the requirements on all the benchmarks, and while we don't see the ROIC increasing from each benchmark to benchmark, I'm certainly not worried when I see numbers like these, on the contrary, I'm very happy.



The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. It doesn't seem like the 10 % requirement is any problem for Alibaba. These numbers are outstanding, and I cannot really come up with anything bad to say.



The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. The numbers are overall very good. Of course, there are some benchmarks that are a bit lower and others that are very high. Regarding the 1-year benchmark, you must keep in mind that Alibaba is following the fiscal year. Hence, we already had experienced some of the last year's headwinds.



The Equity Growth Rate in all benchmarks looks great. According to Phil Town this is the most important of the growth rates. It is very encouraging to see that Alibaba doesn't have a single benchmark below 30 %! Yes, the older benchmarks were higher but I'm certainly now going to complain about the equity growth rate going from 61,6 % to 34,1 %.



Finally, we investigate the Cash Growth Rates. Once again, the numbers are stunning. Not below 40 % in any of the benchmarks! Not many companies deliver numbers like these, and if you know any, please let me know!



I usually summarize the five numbers. And to summarize the numbers of Alibaba is very easy, as they are all great. Only one benchmark in all the numbers in all benchmarks fails to be above the 10 % requirement, as it comes in at 8,9 %. Few companies can deliver numbers like Alibaba has, and if you are investing or are considering investing in Alibaba, seeing numbers like these should make you happy. With that being said, we will probably see worse numbers in the 1-year benchmark once this fiscal year is over, and that is something you need to be prepared for. I will of course update the numbers once we get them.


Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Having done the calculations on Alibaba, they show that Alibaba can pay off their debt in 0,90 years. It is way below the requirement of 3 years, which means that debt isn't an issue if I should choose to invest in the company.


Like with all other companies, there are some risks if you choose to invest in Alibaba. Luckily, Alibaba just held their investor days, where they mentioned different market uncertainties both in the short-term and mid to long-term. Of short-term risks they mentioned impact of COVID-19 on consumption growth, global supply chain challenges, and regulatory policies. There are still a lot of uncertainties when it comes to the pandemic, and how it will affect consumption growth in the short-term, and I don't think anyone can predict how it will end. Supply chain challenges is an issue for all companies, and unfortunately, we don't know for how long it will last. Regarding the regulatory policies, I will write about that in the next paragraph. Of mid to long-term risks, they mention fast-changing consumer demands and market competition. I will elaborate a bit about that later.


The regulatory policies are the primary reason why the stock price of Alibaba has lost more than 50 % from its all-time high in October 2020. By regulatory policies we don't have to look only at China but also at the United States. We have heard a lot of talk about the U.S. wants to ban Chinese companies from their stock exchange and ban American citizens from investing in the companies. I will try not to go too much in details but there are 3 things you need to be aware of, when it comes to the risk of the U.S. delisting Chinese companies and ban Americans from investing in Chinese companies. There are two executive orders made by Donald Trump, the first is the executive order on addressing the threat from securities investments that finance communist Chinese military companies. It doesn't seem plausible that a company such as Alibaba will fall under this executive order, as no e-commerce companies has made the list made by the U.S. Department of Defense. The second is the executive order addressing the threat posed by applications and other software developed or controlled by Chinese companies. This is a larger threat, and it was this executive order that was used to blacklist Alipay. Nothing suggests that this executive order will be used, especially because it was made by Donald Trump and not Joe Biden but to me, it is the largest risk coming from the U.S. It also means that I'm not too worried about the Holding Foreign Companies Accountable Act, which is what get the most publicity in western media. The act means that SEC can request to inspect audit papers for any company that is listed in the U.S. If they do not receive the audit papers within 3 years from them asking, the company will get delisted. Luckily, we have seen some good news from the CSRC (the Chinese SEC) regarding the potential problem in SEC accessing the audit papers. Just before New Year's, the CSRC stated: "China will actively promote cross-border audit and regulatory cooperation. In today's highly globalized capital markets, there is a greater need for national regulators to strengthen regulatory cooperation and policy communication". It sounds to be that they are working on a solution. We also have regulatory policies in China that needs to be addressed. One is the potential banning of the VIE structure. I never saw this as a real threat, as I see no reason for that to happen, and it seems like it won't happen as CSRC has proposed some draft regulations for overseas listing. If companies follow these regulations, they will be approved, and we won't see another DIDI scandal happening. Regarding the draft regulations CSRC stated: "Companies with VIE structure that meets the compliance requirements can go overseas for listing". It surely doesn't sound like they want to ban it. We also have the various regulations in China, which is what has built the negative sentiment towards China, and while some people believe they are to destroy Chinese companies, I think differently. I believe you need regulations for it to be sustainable, so does the CSRC, which stated: "Opening up to the outside world is China's basic national policy and that the purpose of improving the regulatory regime is to promote a healthier, more sustainable and longer-term development, rather than policy tightening. The $15,5 billion donation to common prosperity. It could be to get in the good graces of the Chinese Government but according to Daniel Zhang it will boost common prosperity, which will boost the company's future business. Alibaba was probably nudged into the donation, but I see the point of Daniel Zhang, and I don't think it necessarily will be a bad thing.


Let's move on to the potential of Alibaba. It is no secret that revenue growth has slowed down a bit but interestingly, the revenue is more diversified now, as more of the revenue comes from international commerce and cloud. They believe that international commerce will continue to grow, as the e-commerce penetration is very low in both Southeast Asia and in the EMEA region. Their cloud business is also expected to grow moving forward. During their investor days they mentioned that the Chinese cloud market is expected to grow at a 37 % CAGR compared to 21 % CAGR in the U.S. As mentioned previously, Alibaba is already the largest cloud company in China, and they will get their share of the growth. The cloud business in general also has high margins. Still potential in Chinese commerce. Alibaba already has 953 million users in China, but it doesn't mean they cannot grow their revenue. Alibaba believes they can grow in less developed areas, while they also expect increased spending from their youngers users as they grow older. Furthermore, Alibaba expects to reach 1 billion users by the end of this fiscal year.



All right, we have gone through the numbers, risks, and potential regarding Alibaba and now it is time for us to calculate a price. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS which is a bit lower than the last two fiscal years at 7,5. I chose an Estimated future EPS growth rate of 15 (which is the highest possible I use but below Alibaba's own estimations), Estimated future PE 30 (which the double of the growth rate, as the historically PE for Alibaba has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY", we come up with the sticker price (some call it fair value or intrinsic value) of $225, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Alibaba at price of $112,5 (or lower obviously), if we use the Margin of Safety price. If we use the same numbers but use the 22 % growth rate and estimated future PE of 44 that Alibaba expects, the margin of safety price would be $297,92.


The other calculation I will mak is the PAYBACK TIME. It is also described in "MY STRATEGY". With the Free Cash Flow Per Share at 9,10 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $143,65. If we use the growth rate of 22 % as Alibaba expects, the price would be $197,2.


I have decided not to share my TEN CAP price here, as it is way too high, and I don't think that it would help anyone. Hence, I have decided to omit it. I can tell you though that is way higher than both the Margin of Safety and PAYBACK price.


I believe that Alibaba is a fantastic company. It is a company that delivers a high ROIC and large growth in all the areas I look at. The company still have plenty of areas to grow in and the focus will be on international commerce and cloud moving forward. I believe they have the right management, and I'm very confident in them being able to move Alibaba forward. Yes, there are some risks regarding Alibaba and other Chinese companies. I have tried my best do describe these risks in a long paragraph in this analysis. As mentioned earlier, Alibaba is my largest position, and I don't believe that Alibaba should trade at these levels, which they wouldn't if it wasn't for the negative sentiment. This sentiment can continue for a long time, and it is impossible to know when the sentiment will change, so you will need to be able to stomach that, together with potential delisting risks, if you invest in Alibaba. Personally, I think it is a good deal, if you can get it below a very conservative calculated PAYBACK price of $143,65.


My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to increase my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.


I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.


Some of the greatest investors in the world believe in karma, and to receive, you will have to give. If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to the international tiger project. There are only few tigers back in Sumatra, and they need all the help they can get. If you have a little to spare, no matter how little, I would appreciate it if you would donate a little here. Thank you.



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