Alibaba (BABA 2.11%) is a divisive stock. The bulls believe the Chinese tech giant's stock is undervalued relative to its growth, while the bears claim the fundamentals won't matter as long as China's regulators continue their unpredictable crackdown on the country's top tech stocks.
Just last month, I highlighted a green flag and a red flag for Alibaba's future. On one hand, China's decision to not ban variable interest entities (VIEs) outright allayed some fears about its stock being delisted. But on the other hand, Alibaba's cloud business dropped the ball with a security mishap that resulted in the six-month suspension of an important government contract.
Image source: Alibaba.
At the time, I said more green and red flags would likely appear in 2022. So today, I'll highlight two new polarizing developments for Alibaba -- one that favors the bulls, and another one that favors the bears.
The green flag: Munger's big buy
In an SEC filing on Jan. 4, Charlie Munger's Daily Journal (DJCO 1.81%) revealed that it had nearly doubled its stake in Alibaba. It ended the year with 602,060 shares of Alibaba, which are currently worth about $78.3 million, compared to 302,060 shares in the previous quarter.
That's only equivalent to about 0.3% of Alibaba's enterprise value, but it still represents a major vote of confidence in a stock that has plunged nearly 40% over the past six months. Daily Journal also didn't change its stakes in its four other biggest investments: Bank of America, US Bancorp, Wells Fargo, and the South Korean steelmaker Posco.
Munger's interest in Alibaba is noteworthy for two reasons. First, he's a legendary value investor who has been Warren Buffett's right-hand man at Berkshire Hathaway for decades. If he thinks Alibaba is undervalued at less than 13 times forward earnings, it might be time to tune out the noise about the near-term regulatory threats.
Second, Munger repeatedly praised China, its regulatory moves, and its decision to rein in Jack Ma and Ant Group over the past year. Those controversial comments were widely criticized in the U.S., but they also suggest that Munger views China's tighter oversight of its tech sector as a disciplined move that could stabilize the market, instead of an unpredictable headwind that could disrupt Alibaba's long-term growth.
The red flag: J.P. Morgan analyst issues a bearish warning
On Jan. 7, J.P. Morgan analyst Alex Yao reduced his price target for Alibaba stock from $210 to $180. Yao said he was "turning more cautious" on China's online consumption outlook, and expects Alibaba's consumer management revenue (CMR, which primarily comes from its third-party sellers) to come in between negative 2% year over year and positive 5% in the December quarter.
That conservative outlook wasn't surprising, since Alibaba already cut its full-year revenue guidance from about 30% growth to 20%-23% growth last quarter. At the time, it blamed that slowdown on macro and competitive headwinds for the CMR and direct sales segments of its commerce business.
Yao also expects Alibaba to increase its strategic investments in its Chinese commerce segment on a sequential basis in the December quarter. Yao expects that spending pressure to gradually ease as its CMR growth improves throughout the March and June quarters.
Yao believes Alibaba's stock will remain under pressure, despite trading at "low valuations," as investors focus on those near-term headwinds.
Should you listen to the bull or the bear?
I believe Munger's big purchase is a lot more meaningful than J.P. Morgan's price cut. Munger has an impressive investing track record with value stocks, and he's confident enough to nearly double his position in Alibaba. Meanwhile, Yao's comments aren't all that different from Alibaba's own cautious outlook during its latest conference call.
That said, I'm still not interested in buying Alibaba, or any other Chinese stock right now. The entire sector faces too many unpredictable headwinds, and American tech stocks could generate much better returns this year.
