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BABA Stock: Is Charlie Munger Error-Free with Alibaba?

Warren Buffet is still an inspiration for many investors. However, many also try to pay close attention to his longtime partner, Charlie Munger. The recent news that Munger’s publishing company bought 165,320 shares of Alibaba Group (BABA) took many in the market by surprise.

Alibaba is a world-class growth stock. However, it happens to be domiciled in China, a rather unforgiving place to do business these days.

That said, Munger, who is 97, is still active in the investing world. He sees value in China right now, and he’s put up some of his spare cash from The Daily Journal Corporation (DJCO) into Alibaba as a vote of confidence.

Mr. Munger’s investment actually came in Q1 of this year, before the tech “super crackdown” by Chinese regulators. Accordingly, Mr. Munger is still knee deep in the red with this investment.

However, according to his recent 13-F Filings, no shares of Alibaba were sold during the dip in share price. This indicates that Buffett’s longtime partner is still bullish on Alibaba’s long-term prospects. As am I.

Given that Alibaba is now a major holding of Munger, should investors follow in his footsteps? Or, is this stock simply one Munger has gotten wrong?

Let’s dive in.

BABA Stock: Value or Growth Stock?

Despite rather strong recent earnings reports, Alibaba’s status as a growth stock has been challenged.

By what, you may ask?

Well, by the company’s startlingly low valuation. Alibaba currently trades at a valuation that approximates one-quarter of Amazon’s (AMZN), despite having eerily similar business models.

Investors are worried that Chinese regulators could simply regulate the growth out of tech. The Chinese Communist Party has been concerned for some time that shareholders may benefit at the expense of the average working person.

This is simply unacceptable in a communist environment, which is obviously at odds with the growth-oriented focus a capitalistic system provides.

Accordingly, investors don’t really know what to make of Alibaba’s historical growth.

With that in mind, Alibaba is starting to look like a hyper-growth play at a bargain-bin valuation. For long-term value investors like Munger, that’s too good to ignore. However, for those with a weak stomach, this sort of volatility could be difficult to handle.

Buybacks?

Let’s assume Alibaba will devote more if its profit moving forward to “enhancing the social good” in China. Where will that leave shareholders?

Indeed, earnings per share may have difficulty moving higher. If the company reinvests in lining Chinese regulators’ pockets, or the CCP’s budget, over reinvesting in its core business, eventually growth will slow.

However, if Alibaba is able to do both — that is, reinvest in China but also buy back shares — then it’s possible investors could see meaningful EPS growth over time.

While a dividend may be out of the question for some time (if not forever), Alibaba has announced that it’s raising its share buyback program to $15 billion from $10 billion.

The argument can certainly be made that Alibaba would not increase its share buyback program if it didn’t see more cash flow and earnings on the horizon.

What are analysts saying about BABA stock?

TipRanks’ analyst rating consensus considers BABA stock a Strong Buy. Out of 24 ratings, there are 22 Buys, one Hold, and one Sell recommendations.

The average BABA price target is $269.43. The price target lies between a high of $336 per share, and a low of $190 per share.

Bottom Line

Altogether, Alibaba looks like a great deal, if investors are ready to handle the risks associated with investing in China.

This is a stock that looks cheap, and then gets cheaper. Indeed, a “falling knife” may be an accurate way to describe BABA stock in recent months.

However, the fact that Munger is bullish on this stock long-term leaves little room for interpretation for value investors. This is now a growth stock, trading at a valuation that doesn’t make sense anymore.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article

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