Please ensure Javascript is enabled for purposes of website accessibility

Alibaba Stock Soared Today -- Is It a Buy?

By Rich Smith – Updated Jan 5, 2022 at 2:55PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Warren Buffett's best friend sure seems to think so.

Chinese e-commerce giant Alibaba Group (BABA 14.26%) stock had a rough year in 2021. As the Chinese tech stock market imploded, Alibaba shares shed roughly 50% of their value, costing outside investors in excess of $300 billion in stock market losses.

But this morning, Charlie Munger threw those investors a lifeline.

As Reuters just reported (and I rereported), the chairman of the Daily Journal Corporation (DJCO -1.18%) and vice chairman of Berkshire Hathaway just had the former of those two companies double its investment in Alibaba stock. In its second big purchase of the past year, Daily Journal scooped up 602,060 American depositary shares of Alibaba for about $36 million total.

Now why might Munger do something like that? It only takes a little quick calculator work to find the answer.

Even after today's spike in share price, Alibaba only has about a $342 billion total market capitalization. Compare this to Alibaba's $19.6 billion in annual profit -- or even better, to its $24.1 billion in annual free cash flow -- and it soon becomes clear that the stock is selling for a bargain price.

As of 12:10 p.m. ET, shares of Alibaba sell for about 17.5 times trailing earnings, or an even more attractive 14.2 times trailing free cash flow. Subtract the net cash on the company's balance sheet -- because according to S&P Global Market Intelligence data, Alibaba has $43.4 billion more cash than debt -- and Alibaba's cash-adjusted P/E ratio is just 15.2, and its cash-adjusted P/FCF ratio is an enticingly cheap 12.4.

Granted, there are risks to investing in China. And with most analysts warning that Alibaba will average only about 8% annual earnings growth over the next five years, it's possible the Chinese tech giant's best growth days are behind it. Still, at valuations these cheap, you're not paying much for the risk involved in buying Alibaba shares.

This, in a nutshell, is probably why Charlie Munger has decided that Alibaba is a buy.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.