It’s over for Alibaba. Or is it? My thoughts about the extreme selloff of BABA stock.
This week, the markets sold off Chinese stocks in freaking out over President Xi Jinping getting a third term in office. BABA fell 20% from $72 per ADR share on October 21 to as low as $58 a share on October 24 before recovering into the $60 range.
The plot is thickening for Alibaba because just when it seems darkest, there’s either light at the end of the tunnel or it goes pitch black.
Who knows what will happen, but maybe we can gain a little bit of perspective and wisdom from what Charlie Munger said about China.
Of course we could always see things from our western perspective, but I think it would help to have an open mind to try to understand the rationale of what’s going on with the Chinese form of capitalism.
The fact that BABA is trading below its 2014 IPO price of $68 per share (adjusted for inflation is like $85 a share) suggests that foreign (western) investors have all but given hope on this stock. It would have to be a 5 bagger to return to its all time high stock price.
Maybe the markets feared that Xi Jinping will become a Chairman for life like Mao was, and their initial reaction is that this leader would not promote economic growth as much.
You would think with Xi cementing his power, that he would continue to do what’s right for the Chinese people. Since 2021 the Chinese government has been pursuing a “common prosperity” initiative of increasing social equality, and it could take until 2035 or longer to be fully realized.
Alibaba has had to contribute to this initiative by committing $15.5B, which we might see as a “fee” but they consider it an “investment.” Maybe it will be worth it someday if it means the Chinese people can spend more and live a better life.
With how Chinese real estate has crashed, we can maybe think of this as their housing bubble crashing and they have to get through this dark economic period (maybe even a recession) to emerge better later on.
China’s GDP is projected to only grow at 2.7% according to Nomura. It’s a big slowdown compared to their GDP growth rates averaging above 5-6% in the last decade. In comparison, the US has averaged 2-3% GDP growth rates in the last decade.
We should try to remove ourselves from immediate concerns and imagine what their economy and population will look like in 10-20 years from now. Will it be better or worse, and use more technology and cloud services or less? Even though the Chinese Communist Party appears to be ruling with a heavy hand, I would have to assume that their society will get better and will continue innovating on technology.
Some bright spots would be if they lift the Covid Zero policies and lighten up on regulatory constraints on Chinese big tech companies. But some potential problems could be if the US fights China over Taiwan, and if Chinese stocks get delisted from American exchanges.
If you own Alibaba stock, this is the kind of thing you have to be completely unemotional about and almost “set it and forget it.” You might have to wake up in 5-10 years and see if it’s recovered by then, if not thriving again perhaps. If you have the nerves of steel and conviction to invest in BABA at these levels, this could be the kind of opportunity that investors like Warren Buffett and Charlie Munger look for.
We should learn from what Charlie Munger said about China at the 2022 Daily Journal meeting, as they could either be his famous last words or he might be proven right in his infinite wisdom.
Obviously Charlie approves of how the CCP is running things over there, and it’s incredible how they brought millions of people out of poverty in such a short amount of time. We shouldn’t judge the way they do things just because it’s not what we typically do in the west, per se.
We have to remember that the Chinese government has a financial stake in a bunch of Chinese companies, so it’s in their better interest to allow them to grow. I could see the regulatory crackdown ending sooner than later.
Maybe back in 2021, Chinese companies seemed more attractive on a valuation basis than American stocks, but now I wonder if the Daily Journal (DJCO) would rather invest in more American equities now that their stock prices have come down a lot. But so far DJCO has neither sold nor bought more BABA shares.
Charlie Munger and a few superinvestors are still sticking with BABA in spite of many others bailing as I discussed in a recent video about its current performance.
But it’s probably best if we only invest in the stocks we feel comfortable in, so I hope for the best in any of the investing decisions we might make! BABA is clearly not a stock for the faint of heart.
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