BABA Stock Analysis - Is Alibaba Stock DEEP VALUE? Charlie Munger BOUGHT, SHOULD I BUY MORE?

warren buffett and charlie munger are widely considered to be among the most successful investors of all time they've been business partners for decades and they've seen incredible growth with the investment vehicle and publicly traded company berkshire hathaway recently charlie munger came into the news as he bought a little bit of alibaba stock with one of the companies that he helps oversee which is the daily journal company based in los angeles and this prompted me seeing this news made me ask if i should actually buy more uh you know if this is your first time tuning in you know my name is daniel you're watching unrivaled investing this is a no hype mission focus channel to try to find exceptional companies and unrivaled investments and i've actually owned alibaba for a little bit and so seeing that one of the greats has actually decided to start buying made me wonder if i should be buying more and made me think hey we should revisit the valuation so we can properly understand what's the risk reward and so i wanted to make a video about that so that you can see what the risk reward potentially is and what charlie munger is seeing as he's investing so should i buy more and so first you know you need to have a little bit of perspective which is this alibaba purchase uh as reported with the daily journal it's only 37 million dollars i say only 37 million because you know you're dealing with the the major leagues over here where uh you know if you look at the the berkshire hathaway portfolio this is this is 280 billion dollar equity portfolio so this is almost like a rounding error now it's not the same vehicle this is daily journal but it is you know it's relatively small small potatoes uh small small chips relative to what these investors these great investors uh are familiar with and have done so if if you know charlie munger had talked warren buffett into buying it i think you would have seen it at berkshire and it would be for a much larger or more material stake and so why has alibaba been in the news lately so first of all in the last few weeks last few days you've seen a record fine paid where regulators have slapped a 2.8 billion dollar fine effectively determining that they had abused their market position and trying to do monopolistic tendencies this this really comes about from several lawsuits from other competitors in the e-commerce ecosystem where alibaba had forced certain merchants to choose which platform they wanted to work with and you know another example of alibaba being in the news for the wrong reasons were a few months ago they pulled their ant group filing following a speech that jack ma the founder of alibaba had made where he had said and also the co-found and also the founder of ant group which is their financial subsidiary that provides like microfinancing and loans to merchants as well as individuals along with a whole bunch of other things where he was critical of the financial system in china are you know suggesting that there is potential for you know significant improvement or even potentially revolution and this obviously got the chinese communist party upset and so you know the ant group financial with ipo was pulled and jack ma sort of went missing for a few weeks he subsequently reemerged but his his public scale has been toned you know turned toned down significantly since then so you know that's the second i would say strike two and then you know strike three is here it is after this ipo was pulled you you see that this ant group you know they've had to sort of restructure their business uh based on the regulator saying you know what you're not going to be able to do this you're going to need to do have new different types of licenses and based on some people's you know estimates that they're saying you know up to 60 percent of ant groups revenue uh could take a hit because they will no longer be able to do some sort of the cross-selling that they had previously been able to do so this is part of the chinese government anti-monopoly plans so you see all this you know sort of negative headlines you see this ant groups rectification plan you see jack ma you know he has to go into hiding they pull up a major ipo of this ant group uh you see a major fine of several billion dollars and makes you wonder you know despite all these negative headwinds why would charlie munger be buying now keep in mind charlie munger's reported purchases for the daily journal that was in this that was for december 2020 or that period so that you're you know you're not looking at you know the latest financials this is you know this this isn't based on the last week's data that said he's a long-term investor so it's it's unlikely that it's going to be you know that he's you know sells in and out of this based on this news i'd largely suspect he anticipated some of these things so why is he buying despite what what some would argue are really terrible headlines and you know this is where you start actually needing to understand well what is alibaba and you should understand alibaba is a behemoth i mean it puts every other company in terms of scale to perspective where you know they have 902 million mobile active users nearly 800 million active consumers and their share of retail sales in china has continued to grow i mean you're talking about a multi-trillion dollar market and they've continued to take market share over time and when you look at this behemoth they have so many different business segments i mean it would it would be impossible to break all of this down in one youtube video one one you know ten to half hour long youtube video just because there's so many different segments you have segments that are focused on consumer to consumer versus business to consumer versus effectively fancy grocery stores or remodeling certain types of grocery stores there there have international e-commerce logistics services uh they have wholesale solutions cloud computing digital and media and entertainment they also have a web browser so there's a lot and they also have several new initiatives where like live streaming short videos and that that tie into commerce so this is you know there are so many different bets going on here that's moving this company forward that it's it's sort of difficult to understand well what exactly is going on here how do we actually value this and to put this in perspective their investor day their most recent investor day was three days long so this is certainly not going to be just one youtube video you know they their investor date was september 28th september 29th and september 30th you know that said what we can do is we can try to value it based on sort of breaking these things apart looking at individual components um you know but before getting into the valuation sort of diving into this asking ourselves whether or not alibaba is a you know this deep value investment because charlie munger has been buying it lately you know i'd quick plug where if you're interested in following my personal journey go to unrivaledinvesting.com click on journey where you can see each month i call it one but one potential multibagger type of company that i think can potentially go up hundreds or thousands percent over time i also have my my monthly portfolio detail that's usually during the first first week of the month we're trying to build a community of like-minded investor investors and there's also exclusive content much like the exclusive follow-up video that i'm going to post after this one and if you enjoy just learning about potential multibaggers make sure to hit that subscribe button right now or hit that like button so let's dive right back into alibaba understanding it and so look at all these different line items i mean there's so many different pieces going on here uh and so it sort of forced you to ask yourself like well how do you eat an elephant uh and the answer is it's one bite at a time where you sort of figure out okay well what am i going to be digging into here and so you first see well okay here's their total core commerce business which you know going back over here their core commerce they're saying that's the vast majority of the revenue and it includes all these different things except for cloud computing digital media and this innovation initiatives and others so all of this is in their core commerce business and so you look at that and first understand so that's that's 460 renminbi billion renminbi i should say and the majority of it is their customer management which effectively is commissions and advertising revenue that they get from their major legacy platforms like taobao and tmall so that's that's their legacy business and that's been incredibly lucrative but they have been acquiring and expanding into other areas that are much lower margin for now um but have been growth drivers like the logistics segment or getting into their grocery segment where they're trying to make a much improved grocery experience for consumers we can just you know walk into the store and pick it up it's the idea of you know you don't even need a a cashier at the end you can just get scanned in uh so that's you know understand okay they're they're having these other initiatives over time that should be driving lower margins for their core commerce business over time this this customer management business which traditionally was just commissions effectively fees from transactions on their platform and advertising revenue that was very very high margin so now that margin is going to be going down as you have these other faster growing line items and then you also have cloud computing which is growing very quickly relative to these other initiatives so most of my focus you know if i'm going to break this down is going to be okay what's sort of a back of the envelope for core comp for core commerce as well as understanding what's the potential for cloud computing and you can see what their profitability looks like once again all of their profitability comes from their core commerce of which the vast majority is their legacy platforms like taobao and t-mole whereas you know and whereas you could see it's been unprofitable all these other initiatives these other business segments that they call out that said they are expecting their cloud computing effectively to start breaking even or be profitable in the upcoming year so you know as we dig in and start thinking about valuation and this is this is part of my value proposition to youtube subscribers so please make a point of subscribing is that i you know i put this valuation sheet in the description of the video so you can click on it and play around with the assumptions as you see fit and so for this one you know what we're looking at is you're you're looking at their core commerce segment trying to figure out well how much is this segment worth relative to to the total valuation the business currently and so you can see how much it's grown over the last few years you know growing from 214 billion renminbi to 436 this year their their their fiscal year ends in march um and so it's it's already actually over but they haven't released their fourth quarter results yet so based on their year-to-date figures it's probably going to be mid-30s percent growth that that's based on how they've historically done so far and their optimized margins here are actually a lot lower that's that's how i'm penciling out now you could argue maybe i'm being conservative but they're currently there their margins for the segment are actually mid 30s i'm using a range of 20 to 25 so once again you could say this being overly conservative but this is also recognized the direction in which their margins have been heading where their margins used to be 50 40 percent now 30s a lot of this is because they're moving into lower margin segments that are part of cor that are part of commerce you know retail sales in china but it's not as lucrative in terms of pure profit margins as what they started off with which was pure platform dynamics and so you know you look at that so i'm putting in 20 to 25 margin then what's their growth rate in the ensuing five years and so you can see i'm i'm penciling out once again you you could say this might be conservative or you could say this is too aggressive 12 and a half percent to 20 you know a little over 20 annualized growth rate in the ensuing five years and then what's the what's the multiple that you would assign this business value if this were a separately traded entity what what would be the multiple you'd you'd give and so based on you know based on their growth rates based on their margins you know if you see continue to see margins going down you might get a lower multiple so i put 15 to 25 times now what's really interesting here is that this segment this core commerce segment based on these assumptions that i'm that i'm articulating here you can see that the upside scenario and that's how i always try to you know do a range i do a you know low base and high is that the upside scenario based on let's say this twenty percent plus revenue keger 25 times n multiple and 25 percent optimized margins that gets you to 8.7 trillion renminbi valuation versus their current valuation for all of alibaba of 4.3 trillion it's currently if you were to convert that to u.s dollars it's currently around 650 billion us dollars so effectively this is this these financials in the high side say hey this company could be a multi-trillion u.s dollar company certainly multi-trillion renminbi company and it's interesting to see that this core commerce business if they continue to execute and and do better let's say than these conservative assumptions could this segment alone could be worth more than alibaba is trading at today uh alone so not even giving credit to all the other assets that we're going to talk about in a second you know similarly if you you look at the more conservative scenario which you know assumes this low teens growth in the ensuing years and a 20 20 optimized margin keep mine that's that's nearly a 50 drop in in profits for this segment now it's it's about i i throw on unallocated costs you know which is sort of like overhead into the segment as well and so you could see you know using slapping on a 15 times multiple which once again you might argue that's being too conservative then you know you're looking at 2.6 trillion renminbi valuation for their core commerce segment versus their total market valuation of 4.3 so you're effectively saying hey maybe there's you know 30 something for 40 percent downside just based on their core commerce not giving any sort of you know as any sort of value to their other segments let's talk about some of these other segments as always you know full full disclaimer this is this is a hypothetical valuation and the stock price can go way above or way below what i what i pencil out i just like to work from a logical framework when i'm doing this and you can you can play around with your the assumptions as you see fit yourself and so you know next up is you know looking at their their cloud business where you know here according to internet china internet watch literally 40 cents of every dollar spent in china on cloud services whether or not it's cloud infrastructure is going to alibaba so they're the top dog in terms of cloud infrastructure in china so if you if you think more and more companies are going to be spending on their cloud solutions cloud infrastructure i mean i would that that would seem like an obvious play which is that alibaba is going to continue to win you know generally the thesis for for cloud companies is that it's just so much more affordable than building out your own servers plus you get all this tech and you sort of get an ecosystem of developers that are using your platform so having the scale of being you know 40 cents of every dollar that's being spent that's a big deal that means they're probably building out an ecosystem of better developers and more applications that's more valuable to the next generation of companies that are going to get launched on china's alibaba cloud so then looking at cloud computing segment you know what could that be worth and you know once again it's growing faster than what we see in you know with their core commerce segment with 80 growth and then 60 growth and you know in in the most recent fiscal year it's probably in the mid 50s somewhere maybe even the high 50s in long term what's their optimized margins given that currently it's unprofitable you know if you look at aws or amazon's you know uh cloud platform you can see that they're currently you know between high 20s or low 30s percent margins so you know i'm doing a range of 25 to 35 percent margin you know based on you know alibaba having a top position then what's their growth rate in the years ahead you know looking at a annualized growth rate of 30 to 40 percent you might say i'm too aggressive with 30 on the downside you might say i'm i'm too you know conservative on the upside with only 40 percent keger when it's been growing at you know 50 60 plus the last few years longer term you know i say five years out value this at 25 to 35 times once again this is a higher multiple than when you saw with their core commerce segment partly because you're gonna i'm expecting higher margins and i'm also expecting higher growth for longer and so you know looking at this the cloud computing segment could be 3.6 trillion renminbi value on the high side which is almost the full value of their current market cap so that's that's really interesting to think about that their cloud segment alone could be alibaba's current valuation so that that does strike me as interesting like wait a second so you're getting this core commerce business and then throwing in this cloud computing business almost for free and you know the end it's growing super fast so this is this is smelling right i'm glad i own shares personally and seeing that charlie munger's buying is really getting me interested you know but there are you know even even more bad headlines one could argue and here's one from from a few days ago a few weeks ago talking about how china wants to break up alibaba's influential media business and how alibaba owns several you know media and entertainment assets including a stake in the south china morning post newspaper social media platform video streaming platform yoku um and they have a movie production house alibaba pictures they have a largest offline advertising advertising network so they the alibaba is this sprawling behemoth uh and honestly looking at this segment and it just doesn't move the needle you know i did plug it in you can see this in the valuation sheet but even in the upside scenario that i sort of pencil out you know it is i'm sort of saying lower margins and 20 times multiple i am saying that it's not even worth 10 of their current valuation so i in this video i'm not going to spend that much time focusing on this segment especially when looking at cloud computing and core commerce really can move the needle and be dramatic you know for valuation and potential gains for shareholders longer term and so you know then the next bit well what about you know this ant group you know they they did scuttle the ipo but don't they still own a stake yeah they still own you know a third of this business and yes they had to deal they have this new rectification plan that's going gonna result in changed business practices but here's an article you know from forbes saying look yeah they might not get the 315 billion dollar valuation that they're originally expecting but now you know it might be around 150 billion you know some yeah you're getting a 50 plus haircut and so you know you take this and so you see i'm i'm i do a range of 115 to 200 billion dollar valuation they're 33 cut you know converted to renminbi and that's over 10 of the value of of alibaba just right now and that's this doesn't really even think like could this be undervalued could this grow significantly in the years ahead that's just the valuation sort of ascribed to it recently so that's that's also strikes me as super interesting and so you summarize all these different components and you know here's here's the current market cap in renminbi so this this 4.3 trillion renminbi for alibaba and you look at each of these different segments and you can see that it sort of adds up to a very interesting risk reward where you know the downside arguably if these fundamentals come to pass and assuming there's no you know big risks that sort of derail the thesis you know assuming there isn't some sort of you know greater trade war or some other problems that dere derailed this business or china you know really the the communist party clamps down on the business i mean this logic for logical framework suggests really reasonable downside risk and really attractive upside risk and i'd argue this is exactly the type of setup that value investors look for um you know this is so it's not surprising to me to for me to see you know one of my life heroes charlie munger buying alibaba stock after after i've actually bought some for myself because it's the exact type of risk reward that you'd want with value investing the whole the whole premise of value investing is that you know if if you get it at a good enough discount then in theory you you limit your downside and you can capture lots of upside and here it is the valuation i was just showing was saying hey there's potentially a couple hundred percent upside and very limited downside now there are these macro risks to be aware of and i'm actually going to call those out in an exclusive video just for journey subscribers after this um and that that'll also talk about what my plans are with alibaba but i hope this video has been helpful in terms of thinking about you know what's the risk reward for for alibaba what are the different segments you know thinking about wow this is you know here it is this cloud computing segment 40 cents of every dollar spent on cloud infrastructure in china going to alibaba cloud and growing very quickly 50 60 percent a year you know that that alone could be worth what alibaba is today so there's a lot of potential here it's really interesting setup and if you enjoyed this video talking about alibaba and multi-baggers broadly please make a point of subscribing and if you're already a subscriber i do appreciate that thumbs up i'll leave a comment below where with a link for the exclusive follow-up for journey subscribers later this weekend thanks so much for watching

Channel: UNRIVALED INVESTING

Views: 12,587

Rating: 4.924686 out of 5

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Id: SVq59tZ3ns4

Length: 22min 20sec (1340 seconds)

Published: Fri Apr 16 2021