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Why Alibaba Stock Popped 5% Today

By Rich Smith – Jan 5, 2022 at 11:09AM

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Warren Buffett's investing best friend thinks Alibaba is a bargain.

What happened

Shares of Chinese e-commerce giant Alibaba Group Holding (BABA -0.56%) stock bounced back from yesterday's tech stock sell-off to gain 5.1% as of 10:45 a.m. ET Wednesday.

And you can thank legendary investor Charlie Munger for that.

A person stands in front of a stock chart superimposed on a Chinese flag.

Image source: Getty Images.

So what

Today's Alibaba news involves the Berkshire Hathaway vice chairman, one half of the Buffett-and-Munger team that has guided Berkshire to investment success over decades.

This morning, Daily Journal Corporation (DJCO 1.85%), the media conglomerate and holding company that Munger independently chairs, announced it has roughly doubled its investment in Alibaba. After snapping up 602,060 American depositary shares of the Chinese tech giant late last year, Daily Journal now owns $72 million worth of Alibaba, reports Reuters -- all bought within the last year.  

Now what

Why is Munger's Daily Journal buying so much Alibaba stock? The logical implication is that Munger -- a famous value investor in his own right -- must think Alibaba is a value stock. And if that's the case, then he's probably right.

Consider: With a $324 billion market capitalization and $19.6 billion in trailing-12-month earnings, Alibaba stock sells for barely half the average 30 P/E on the S&P 500 right now -- just 16.5 times earnings, in fact. Indeed, Alibaba is arguably even cheaper than that when valued on free cash flow (FCF), because over the last 12 months it has generated $24.1 billion in FCF -- about $1.23 in real cash profits for every $1 it reports in net earnings.

On a price-to-free-cash-flow basis, Alibaba only costs 13.4 times FCF, and if you net out the company's net cash, the valuation drops further still -- to an enterprise value-to-free cash flow ratio of only 11.6!

Granted, there are risks to an investment in Alibaba. For one thing, growth over the next five years is expected to be less than 8% annually, according to analysts polled by S&P Global Market Intelligence. And there's the regulatory risk of continued crackdowns against big tech by the Chinese government.

But if you can stomach the risk (as Munger apparently can), then it's easy to see why Alibaba stock looks like a buy right now.

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.

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