Warren Buffett’s right-hand man, Charlie Munger, has been making headlines over the past year with his big bet in shares of Chinese e-commerce behemoth Alibaba (BABA). Alibaba stock has been in a world of pain, constantly plunging since peaking out back in October 2020. The fall has been painful, and it’s grown to become even more painful.
The mounting losses haven’t stopped Charlie Munger from scooping up more shares, though. He relishes chances to buy more shares of companies he views as wonderful and undervalued. I am bullish on BABA stock.
Charlie Munger Spots a Wonderful Business at a Wonderful Price
It’s not a mystery as to why Munger and Buffett have been venturing into Asia for recent investments. There’s been a lack of value in the U.S. stock market. After the S&P 500 plunged into a correction, there is more value to be had now, but not to the same extent as some of the Chinese tech stocks.
Further, a majority of the damage done to the U.S. tech sector seems concentrated in the unprofitable high-multiple growth stocks, especially those that went public within the past few years. Indeed, it’s hard to value such stocks as interest rates look to rise.
China’s tech sell-off has been going on for quite a while now, and everything has been crushed, including the behemoths at the top of the market. Thus far, mega-caps with earnings to show haven’t taken a brunt of the damage, though they have shown signs of fading in January.
Alibaba Stock: Is the Value Too Good to Be True?
Alibaba is an incredibly profitable company, and it’s growing at an enviable rate. For those unfamiliar with the company, it’s similar to the likes of an Amazon (AMZN). While there are major differences in the two digital retail behemoths, the biggest has to be the valuation.
After taking a beating, BABA stock now trades for 17.5 times trailing earnings. The stock is down over 60% from its peak now, for reasons outside of its control. Indeed, the firm has been slapped with hefty fines from the Chinese government for its dominance, and the economy has shown signs of weakness, but there’s nothing fundamentally horrific about Alibaba, the company.
The company is still more than capable of sustaining a 30-40% revenue growth rate. While coming growth faces tough comparables, with the Chinese government that could add further pressure, Alibaba certainly seems like a value that’s “too good to be true.”
Now, there are major risks of betting on Chinese tech companies. Delistment and a wide range of other issues are hard to factor into a valuation process. If Munger’s growing investment in the name proves correct, though, the upside could be astronomical. Indeed, Munger has a sound knowledge of the Chinese stock market, given Chinese value investor Lee Liu, a man known as China’s Warren Buffett, likely gave him a thumbs up on Alibaba.
While Charlie Munger looks quite foolish for throwing money at a stock that only seems to go down, I’d say it’s likely that Munger will have the last laugh at the end of the day once BABA stock can reverse course. It will take some time, however.
Wall Street’s Take
Turning to Wall Street, BABA stock comes in as a Strong Buy. Out of 23 analyst ratings, there are 20 Buys and three Hold recommendations.
The average Alibaba price target is $188.79, implying an upside of 52%. Analyst price targets range from a low of $140.00 per share to a high of $250.00 per share.
The Bottom Line on Alibaba Stock
In the meantime, expect Charlie Munger to continue building his stake in Alibaba on further weakness. Not much has changed about Alibaba stock other than the price. Still, analysts are likely to lower the bar on their prices targets, as Bank of America’s Eddie Leung recently did over sales weakness at Taobao and Tmall.
As an investor in Alibaba, you’ll be in some good company with Charlie Munger as a fellow shareholder. At the end of the day, I think he will be proven right with his aggressive BABA bet. That said, not every investor has the same magnitude of patience or discipline to make money in the name.
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