Why Mohnish Pabrai Bought $40M Of Alibaba Stock
Welcome to my blog, where I study the best Investors from around the world. This week, we take a look at why Mohnish Parai invested in Alibaba.
Mohnish Pabrai, the Indian-born American renowned investor, who is the Managing Partner of Pabrai Funds, recently disclosed in his portfolio that he entered a position in Alibaba Group Holdings Limited. Mohnish Pabrai when interviewed about his investment in Alibaba disclosed it to be an “incredible business.”
This is what he had to say;
If you look at my filings you can see that we have a position in Alibaba and it's an incredible business. If you look at Alibaba and Tencent and you know where they're at, the ecosystem, the moat, and what they control, and when you look at the tailwinds from China. It’s a lot easier for me than even the large US Tech because the tailwind is so much stronger and there are some serious barriers to entry. It was also very cheap. I think Baba is one of the cheapest plays out there.
Monish Pabrai is an Indian-born American value investor who is the founder and managing partner of Pabrai Funds. Pabrai Funds is an international investment fund that has $450 million in assets under management across the globe and within a wide range of industries. He is very well respected in the investing world, holding close relationships with the likes of Berkshire Hathaway's Vice Chairman and investing legend Charlie Munger as well as Warren Buffett whom he paid six hundred and fifty thousand dollars ($650,000) to eat lunch with at a charity fundraiser event.
Pabrai operates a highly concentrated and value-driven fund with his top five holdings making up 78% of his total portfolio. This approach, although risky some would say, has paid off considerably well with his return since inception, rumored to fast outpace that of the S&P 500 and himself expanding his net worth from only a few million to almost 100 million in the space of 25 years.
Very recently, Pabrai opened a new position in Alibaba, and this caught the attention of many as Mohnish Pabrai is very much an inactive investor and only intends to make big and infrequent bets when he feels the odds are very much in his favor. His position in Alibaba appears to make up around eight percent (8%) of his total portfolio and should have a price range of $220 to $240 depending on where he picked up the majority of his shares.
He also said in a recent interview that they are still purchasing shares this quarter suggesting he will be buying the dip and also making it a larger position than it already is. In one of Pabrai’s most recent interviews, he gave us some clear indications as to why he bought Alibaba in the first place and what makes it such a compelling investment today. So let's see what he had to say…
Thoughts on Alibaba -
- 45.40 to 47.08
Alibaba investment -
- 38.30-38.46
“It's an incredible business,” Mohnish says when quizzed about what’s special about Alibaba. “If you look at Alibaba and Tencent and you know where they're at, the ecosystem, the moat and what they control and when you look at the tailwinds from China. It’s a lot easier for me than even the large US Tech because the tailwind is so much stronger and there’s some serious barrier to entry. Obviously, it’s going to have much larger revenues and profits and such in the future with all the different things they have going on but you're starting from a very large base, so a 600 billion-plus market cap. It was also very cheap. I think Baba is one of the cheapest plays out there. In the long term, I think a lot of the value creation for them is cloud. This is non-existent from an earnings perspective today. They have some scale but I mean they're the number one player.”
He goes on to compare Alibaba with Amazon, he says:
“When you look at Amazon's numbers and Amazon's numbers with clouds are somewhat misleading because they dumped their internal cloud expenses in there. So actually, you know 50 million-50 billion revenue and 15 million-15 billion net income is actually understated. So I think they're making more than 15 on that one because they're growing as well. They're also investing in all the future growth. So the cloud margins are incredible and the issue with the cloud is that very few people can play, I mean in the US, the game is for the most part over. You've got the players and it's hard to even see them even changing the position they're in.”
This suggests that the barrier to entry is extremely high and competition in the cloud space should be minimal.
Here are the reasons why Pabrai Bought Alibaba
Tailwinds for China (especially in Tech) is more superior to the US.
Very high barrier to entry (Wide Economic Moat)
Alibaba is the cheapest play out there (Even at $600bn)
There’s a huge hidden value in the Alibaba cloud
He was asked if he was concerned about the Chinese Government's control over Alibaba.
He said
“I think Alibaba is a crown jewel for China. Just like Tencent is a crown jewel for them. So, I don't think they will want to do things. These are the plays that have the possibility of global footprints that they can get there. So I don't think the government is going to take an approach that is going to kill the golden goose. My take is they've extracted their pound of flesh and they've sent a pretty clear message as to who's in charge. I don't really expect much more than what we've seen already.”
- Chinese Regulation on Alibaba/Tencent - 47.03 - 49.10
Of course, no company is without competition, here are Monish Pabri’s thoughts on Alibaba & Tencent vs US Big Techs.
He says -” I think the large Chinese Tech because of the tailwind, because of the size of the market, because of future GDP growth all these other things that are going on and quite frankly the modesty of the valuations; it is a great place to be.”
Although the PE (Price-to-Earnings Ratio) basis is around 20, the thing is that that 20 has a lot embedded in it. They have a lot of money-losing businesses that are within that 20. So actually the real multiple is much lower. The thing is some of this is the black box; it's we just don't know a lot of stuff that's inside but there's a lot of good stuff inside. Two companies specifically (Alibaba and Tencent), I don't think fit the template of typical Chinese businesses. Both of these businesses from the very early days had international backers and they've got what I would call enlightened leadership; and so if you drill down on the principles of Alibaba for example, you know core principles that they live by. They are very transparent, that's a very core corporate mission. I think Jack Ma put a lot of these principles and vision and mission into the business and it's very deeply embedded. For example, when they hire a new engineer they'll take them offline for four weeks to make sure they get embedded in the company's culture. I think that these businesses have learned that they are really global companies and they need to operate with a global set of rules. So they have been very good partners for their international investors.
Do you think Pabrai secretly owns Tencent through Naspers?
He said both are really good businesses and he thinks Tencent is interesting to look at through a Naspers lens because you can't get a discount if you go through them. Mohnish was subsequently asked if he owns Naspers as well; he says, “I cannot comment on things that are not in the public domain, yes. I like Naspers, I think Baba and Tencent are similar but they're also very different.”
Naspers and Tencent history -
Tencent has this bazooka they carry on their shoulder called WeChat and they can fire that bazooka at will and I mean, you know, when you look at a company like PDD you know they just fire the bazooka and PDD sales suddenly are through the roof you know and so, Tencent has a pretty interesting ability to scale up a range of businesses. I mean their investment portfolio is incredible. I mean there's a lot of stuff there which is going to be huge in the future. We just don't know which one. That's why I think those are good plays because that's a great basket.
So I think we can take from that that Mohnish Pabria is very bullish on Alibaba for some clear and obvious reasons. It was also interesting to hear how bullish he is on Chinese Tech in general, especially in comparison to their US counterparts in terms of both underlying growth and the consumer behavior in China versus the US. Lastly, we also got our hint as to Mohnish’s feelings on Tencent, another compelling company that has unique DNA and growth opportunities.
Do you believe Mohnish owns Tencent through Naspers as a result of his statement? That's exactly what I thought, and it makes me want to dig deeper into Naspers to see how quickly that clear discount to net asset value could close over time.
In summary:
Mohnish Pabrai is very bullish on Alibaba (for the reasons stated above) and also on Chinese Tech in general.
Alibaba is ahead in terms of its runway for growth and consumer behavior. Two major factors will contribute to long-term value.
Mohnish loves Tencent and may own some Naspers stock for Tencent exposure (and believes its a discount)
So do you think Mohnish Pabrai is making the right investment in Alibaba? I hope you enjoyed this week's investing principles from Mohnish Pabrai’s investment in Alibaba. Please like the article and subscribe to this blog so that I can continue to make articles like this for you to enjoy.