To The Moon

$Alibaba(BABA)$ $BABA-W(09988)$

Over the past month, Alibaba's stock price has risen by more than 65%. When a company with a market capitalization in the hundreds of billions sees such a significant increase in a short time, it’s evident that institutional investors are beginning to take an interest. This surge is driven by multiple catalysts affecting not just Alibaba but also China as a whole. In this video, we'll examine the institutional investors who are backing the stock, the catalysts unfolding in China, and Alibaba's latest earnings report. If you enjoy this articles, please drop a like below and share.

Earning Overview

In the third quarter of fiscal year 2025, Alibaba Group reported strong financial performance, with revenue rising 7.6% to 280 billion yuan ($38.5 billion) year-over-year. The company’s net profit surged by 200%, reaching 48.945 billion yuan ($6.7 billion), while adjusted net profit increased by 6.5% to 51.07 billion yuan. This growth was largely driven by the company's investments in artificial intelligence (AI), with its cloud-computing division seeing a 13% increase in sales and international e-commerce growing by 32%. These results highlight Alibaba's successful focus on expanding its AI capabilities and bolstering its global e-commerce presence.

Cash Flow

In the third quarter of 2024, Alibaba reported a net income of RMB46,434 million (US$6,361 million), marking a 333% year-over-year increase, primarily due to higher income from operations and favorable changes in equity investments. The company generated RMB70,915 million (US$9,715 million) in net cash from operating activities, a 10% rise from the same quarter in 2023. However, free cash flow decreased by 31% to RMB39,020 million (US$5,346 million), mainly due to increased investments in cloud infrastructure.

Alibaba has seen a decline in its free cash flow in recent quarters. For example, in the third quarter of fiscal year 2024, the company reported a 31% drop in free cash flow, falling to RMB 39,020 million (approximately $5.3 billion). This decline was largely due to increased investments in cloud infrastructure, which, while contributing to long-term growth potential, placed pressure on short-term cash flows. Despite the drop in free cash flow, Alibaba's overall financial performance remained strong, with an increase in net income and operating cash flow, signaling the company’s ongoing efforts to invest in key growth areas such as AI and global e-commerce.

Market Sentiment

Recently, we’ve seen some market weakness, but it’s important to note that speculative stocks tend to be more affected by market downturns than dividend-paying companies. For example, while many stocks have dropped 2-4%, dividend ETFs like SHD and VM have only fallen by 4% and less than 1%, respectively. If the market remains weak, these dividend ETFs may experience smaller declines, presenting an opportunity to sell and reallocate funds into more speculative stocks, particularly if the market shows signs of a recovery. Additionally, I have a solid cash position of around $113,000 in this portfolio.

Despite the recent market weakness, Alibaba has performed exceptionally well. It’s up over 65% in the past month, more than 70% in six months, and nearly 90% in the past year. However, looking at the last five years, the stock is still down around 33%, and from its all-time highs in 2020, it’s down nearly 55%. This recent rise in Alibaba’s stock price is largely due to Wall Street recognizing the value in China. One early investor in Chinese stocks, Gpar, purchased Alibaba in 2021, but that proved to be too early, and he hasn’t made further purchases since. He is likely still down on his position.

Super Investor

A more successful investor in China is David Tepper, owner of the Carolina Panthers. Tepper holds positions in Alibaba, Pinduoduo, JD.com, and Baidu, and he added to all of them in the last quarter. Notably, he increased his stake in JD.com by 43% and in Alibaba by 18%. Looking at Tepper’s past buys and sells in Alibaba over the last five years, he’s done a good job of timing his entries and exits. In 2020, he made significant sales as the stock fell, but when it bottomed out, he started building his position again. With the stock rising recently, it wouldn’t be surprising to see him sell some of his Alibaba position next quarter.

It seems that, in the long term, David Tepper has faith in Alibaba and its future prospects. Locking in gains is likely what Michael Burry did in the past quarter with some of his Chinese positions, including Alibaba, his largest holding, which he reduced by 25%. He also holds BYD, where there was no change, and JD.com, which he reduced by 40%. Additionally, he holds Estee Lauder, a company with a significant presence in China, and Pinduoduo. Overall, Burry appears to be betting on a recovery in China.

Interestingly, Michael Burry has done a great job building his Alibaba position over time, especially as the stock dipped. This is particularly noteworthy since he is not typically known for holding positions long-term—he often buys and sells within a few months. For him to hold Alibaba for an extended period speaks volumes about his confidence in the company. However, with the stock seeing a massive increase recently, it wouldn’t be surprising if he decided to sell more of his shares.

One of the main reasons investors are becoming more comfortable with China investments is the shift in government policy. A few years ago, China was heavily cracking down on tech companies, but more recently, they’ve been holding rare business meetings with national leaders to boost their competitiveness with the U.S. What’s especially interesting is that Alibaba co-founder Jack Ma, who had been highly critical of the government in the past—so much so that people once speculated that the Chinese government had made him disappear—was invited to these meetings. This marks a crucial step forward for the Chinese economy, which has been weak in recent years, but is now showing signs of life and innovation.

On the technology front, China’s AI sector is generating a lot of buzz. Alibaba, as one of the leading players in AI, has its own AI model, Quen, which they rolled out in 2023. They’ve since launched an updated version, Quen 2.5, which is said to surpass the capabilities of DeepMind’s model. This AI technology is already contributing positively to Alibaba’s performance. The company’s Cloud segment, where AI falls, grew by 13% year-over-year, and AI-specific revenue has grown in triple digits for six consecutive quarters. While Alibaba’s overall growth has slowed recently, driven by its larger businesses, these smaller segments are seeing impressive growth, signaling potential for continued success.

Currently, Alibaba's revenue is growing at around 8%. Breaking it down further, their major group, the Taobao and Tmall group, is seeing a more modest growth of 5% year-over-year. However, International Commerce is up by 32%, and Cloud Intelligence is growing at an impressive 133%. These smaller segments are experiencing much faster growth, which makes sense given that Alibaba is already a massive player in China, making it harder for their core business to grow as rapidly. If they can continue to expand in areas like cloud computing and international commerce, it could be a significant boost for the company going forward.

Valuation

With the stock price rising significantly, Alibaba's valuation has started to climb as well. Their current forward P/E ratio is just under 15, which is relatively high compared to where it has typically traded over the past year (around 7 to 12). In my view, Alibaba could potentially trade closer to a P/E ratio of 20 to 25, meaning there’s still plenty of room for valuation growth. One factor that could certainly drive up Alibaba’s valuation is increased excitement around the company. Recently, GameStop CEO Ryan Cohen increased his stake in Alibaba to $1 billion. While I always recommend doing your own research rather than buying a stock just because someone else did, this news could generate additional hype and potentially push the stock’s valuation and price even higher.

Conclusion

However, it’s important to remember: don’t buy a stock just because Ryan Cohen bought it, or because Michael Burry or David Tepper did, or even because I own shares in Alibaba. Make sure you conduct your own research and evaluate companies that align with your risk tolerance and investment goals.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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