Specifically, he’s wondering why Munger is “doubling down” on Alibaba when many investors are fleeing the scene.
“Alibaba isn't quite the darling of Wall Street it once was,” Curran wrote recently in Real Money. “However, there is one titan of investment who has not yet lost faith. Despite a dismal 2021 and continued concerns on not only regulatory risks, but the stability of the Chinese economy, Berkshire Hathaway Vice-Chairman Charlie Munger is not shying away from the top China tech stock. Instead, he's been steadily doubling down, all the way down.”
Per a recent 13-F filing, the Munger-led Daily Journal Corp. (DJCO) - Get Free Report nearly doubled its stake in Alibaba in the third quarter of this year, moving its stake north of 300,000 shares of ADRs (American Depositary Receipts). The big bet over the course of the quarter brings his total stake in the stock to over $50 million, not a small sum even for Munger.
“As the stock has plummeted over 40% in the past year and has hardly rebounded from an early October nadir that wiped away four years of gains, investors are left with an important question,” Curran said. “Is Munger once again moving in at just the right moment, or is this a mistake from the legendary investor?”
From a purely fundamental perspective, BABA’s price-to-earnings ratio of only about 20 appears paltry next to many high-flying U.S. tech names. “In fact, it is only a third of Amazon's AMZN valuation despite a growing ecosystem and a larger user base than its U.S. peer,” Curran noted.
“As such, Munger might be doubling down on the stock as it goes on sale, certainly a move well within his modus operandi,” he added. “In a more commonly quoted form, he’s getting greedy while others are fearful.”
In the bigger picture, the present troubles in the Chinese economy and the uncertain political environment ahead of the 2022 Party Congress, where Chinese President Xi Jinping is seeking a lifetime term, tend to undercut the otherwise viable valuation arguments. Also, a pivot towards common prosperity presents significant problems for consumer-spending trends that have buoyed Alibaba's rise to its present status.
"We cannot allow the gap between the rich and the poor to continue growing-for the poor to keep getting poorer while the rich continue growing richer," Xi wrote in a recent essay. "We cannot permit the wealth gap to become an unbridgeable gulf."
The issue for investors is that wealthy Chinese consumers drive a disproportionate amount of e-commerce spending, namely on the luxury brands that populate Alibaba's T-Mall online marketplace.
“In short, the sheer amount of questions swirling around Chinese stocks make sussing out a fair valuation for any of the headline names a seriously difficult task,” Curran said. “As such, the waiting may be best done on the sidelines in the case of Alibaba.”