Charlie Munger (Trades, Portfolio) injected massive capital into Alibaba Group Holding Ltd. (BABA, Financial) by accumulating American depositary receipts through Daily Journal Corp. (DJCO, Financial) in 2021. His investment in the retailer was driven by his philosophy of looking for companies with a substantial competitive advantage, sustainable business models and long-term growth potential. Alibaba fit the bill on all fronts as it is one of the largest e-commerce companies globally and has a dominant position in the Chinese market, the world's most populous country.
This belief also influenced his view of the growth potential of the Chinese economy. He has spoken about China's economic growth and how it has rapidly lifted millions of people from poverty. Munger believes that China has behaved shrewdly in managing its economy and that its momentum will likely continue. Munger also recognizes the skillful operating practices of Chinese manufacturers and their increasing use of automation technology.
Alibaba is a company that benefits from the growth of the Chinese economy. As more and more people in China enter the middle class, they are likely to increase their spending on e-commerce platforms like Alibaba. Furthermore, the company has a diversified business model with various growth opportunities, such as its cloud computing division, which has shown substantial growth potential. Munger's investment in Alibaba could be seen as a way to invest in the Chinese tech sector for the long term. Alibaba's dominance in the Chinese e-commerce market and its expanding business lines made it an attractive investment for him.
Munger initially took a sizable position in Alibaba, allocating a large portion of Daily Journal's capital to the stock in the first quarter of 2021, but he trimmed 50% of it a year later.
Nevertheless, as of year-end 2022, it still had a 15.15% position in Alibaba. However, we do not yet know whether it has further trimmed or fully exited the position since the next 13F filing is not due until April.
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Alibaba as a value stock from Munger’s perspective
Munger purchased a significant stake in Alibaba due to his perception of the company as a value stock. Despite promising results, Alibaba was trading at a discount compared to other technology companies. Additionally, the company has significant cash on its balance sheet and large stakes in private and publicly traded companies that add up to much more than the company's market value.
The company's cloud computing division was another reason for bullishness, as its revenue grew remarkably. Since the cloud was still in its early stages in China, the division was expected to have significant future value. In addition, it was investing its significant cash flows from its core e-commerce platform into other parts of its operations, which were experiencing losses but likely to have substantial positive value.
Thus, Munger likely viewed Alibaba as a long-term investment opportunity in the Chinese tech sector. He recognized the company's strong market position, wide moat and long runway for growth. However, based on his comments at the Daily Journal's annual meeting earlier this month, the guru seems to have changed his mind.
He said:
"But I regard Alibaba as one of the worst mistakes I ever made in thinking about Alibaba, I got charmed with the idea of their (dominant) position on the Chinese (market). I didn’t stop to realise it’s still a g**-damn retailer. It’s gonna be a competitive business, the internet, it’s not gonna be a cakewalk for everybody."
As an investor looking to benefit from China's economic growth, Munger kept a close eye on regulatory and economic risks, as they could impact Alibaba's future growth prospects. He also praised Beijing's crackdown on Ant Group and criticized Jack Ma for provoking Chinese regulators in 2021. However, it raises questions about his stance on the company and whether he has overlooked the competitive nature of the retail industry, even for an internet company like Alibaba, which faces stiff competition in the e-commerce space.
He has expressed regret over investing in Alibaba, citing concerns over the company's corporate governance issues, particularly the concentration of power in the hands of its founder. Munger also referred to a speech he made in October 2020, in which Ma criticized China's regulators and banks. The speech led to the Chinese government's antitrust investigation into Alibaba, severely hurting its business. Munger described Ma's comments as "pretty stupid" and accused him of "poking a bear in the nose with a sharp stick."
Therefore, Munger's investment decision was also influenced by cognitive biases, including his steadfast belief in the superior "Chinese system" and social proof from fellow investor Li Lu (Trades, Portfolio). Alibaba has also faced criticism for its lack of transparency in financial reporting and related-party transactions. These issues have raised concerns about the company's ability to maintain strong leadership, manage risk and operate transparently and ethically.
Alibaba has taken steps to improve its corporate governance practices, including creating a board of directors with a majority of independent directors and establishing a special committee to oversee related-party transactions. Still, these efforts have not entirely alleviated concerns, particularly after the regulatory crackdown.
Munger's comments on Alibaba's corporate governance issues suggest he recognized these risks and may have hesitated to invest in the company. Instead, Munger trusted the views of Li, who recommended both Alibaba and BYD Co. Ltd. (HKSE:01211, Financial), another Chinese company in which the guru invested and made significant profits.
Takeaway
Alibaba's stock decline was due to controversies surrounding Ma and Ant Financial, antitrust concerns in China and competition in e-commerce. Additionally, cognitive biases like trust in the Chinese system and influence from others played a significant role in Munger's investment decision, which ultimately led to regret. However, as per the latest 13F filing, the legendary investor has not divested of the position yet, but we might see a partial or full disposal in the next filing.
