Alibaba: My largest investment. Here is why.

Alibaba has experienced some challenging years, beginning with the cancellation of the Ant Group IPO, followed by a crackdown on Chinese tech companies in China. This was compounded by geopolitical uncertainty as the relationship between the United States and China deteriorated. Alibaba also faced prolonged lockdowns in China compared to the rest of the world. Additionally, macroeconomic factors have impacted the global economy. The question is whether all of this means that Alibaba is a wonderful company that can be bought at a wonderful price.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I should mention that Alibaba is my largest position and has been for some time. I will strive to remain unbiased throughout the analysis, but it is important to note that a significant portion of my portfolio is invested in Alibaba. Furthermore, Alibaba is a massive company with a wide range of business operations. Hence, it will not be possible to delve into every aspect of their business, as the analysis would become excessively lengthy. So, if there are parts of Alibaba that you really like that I don't touch upon, I apologize in advance. You can buy Alibaba stocks in both Hong Kong and the United States. The United States' listed share is equivalent to eight Hong Kong shares. You can buy both Hong Kong shares and United States shares at eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

Alibaba is a Chinese multinational technology company. Alibaba was founded in 1999 by Jack Ma and 17 other individuals. It initially began as an online platform aimed at assisting Chinese small businesses and exporters in discovering global business prospects. It has grown to become a very large company, primarily known for its e-commerce operations, although it also has other types of businesses. The sheer number of businesses can make it overwhelming to comprehend the intricacies of each one, let alone write an analysis. However, Alibaba made it a bit easier when they decided to split the business into seven different units in March 2023. The units referred to are the Taobao Tmall Commerce Group, which is by far the largest group, generating approximately 43% of the revenue. It serves the domestic Chinese e-commerce market. The other six business units are Cloud Intelligence Group (approximately 10% of revenue), which includes their cloud computing and AI group. Alibaba International Digital Commerce Group (approximately 10% of revenue), which focuses on international commerce and includes Lazada and AliExpress. Local Services Group (approximately 6% of revenue), which includes food and grocery delivery services such as Ele.me. Cainiao Smart Logistics (approximately 10% of revenue), which is their logistics unit. The Digital Media and Entertainment Group (approximately 2% of revenue), which includes Youku streaming services and their movie production. And finally, its "All Others" segment (approximately 19% of revenue), which includes Sun Art, Freshippo, Alibaba Health, Lingxi Games, Intime, Intelligent Information Platform (which mainly consists of UCWeb and Quark businesses), Fliggy, and DingTalk. Furthermore, Alibaba also owns assets in other companies, such as Ant Group. Alibaba is mostly known for Taobao and Tmall, which combined have more than 1 billion customers in China. Thus, with that number of customers, it is easy to determine that Alibaba has a strong brand moat.

Their CEO is Eddie Wu. He is one of the co-founders of Alibaba and has held various positions in the company until he became the CEO in September 2023. He has a degree in computer science from the College of Information Engineering at Zhejiang University of Technology. He is known for playing a key role in the development and monetization of both Taobao and Alipay (owned by Ant Group). Eddie Wu is still relatively new as a CEO, so it is impossible to judge him based on his limited time. However, he has been part of Alibaba for a long time and has been part of the development of Alibaba from zero in revenues through 100 million to 1 billion and 10 billion and beyond. He has laid out two long-term goals for Alibaba: user first and AI-driven, and he will adjust operations based on these two core strategies and reshape their business priorities in the future. He has particularly embraced AI and stated, "Over the next decade, the most significant catalyst for change will be the disruptions caused by AI in all sectors" and "If we fail to keep pace with the advancements of the AI era, we will be displaced." We don't know much about Eddie Wu, but he has delivered great results for Taobao and Alipay in the past. As a co-founder, he has a vested interest in seeing the business grow. I believe that his emphasis on the importance of AI will benefit Alibaba in the future. Thus, I am confident in Eddie Wu's ability to lead Alibaba's growth in the future.

I believe that Alibaba has a strong brand moat. I also hold the management in high regard and believe that they will drive the growth of Alibaba in the future. Now, let us examine the numbers to determine if Alibaba meets our criteria for a strong moat. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first and most important number we will investigate is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all the numbers being above 10% for each year. ROIC has usually been good, consistently exceeding 10% every year, with the exception of the last three fiscal years. These years were heavily impacted by COVID lockdowns in China, followed by macroeconomic factors that have affected Chinese consumption. Thus, I'm not overly concerned about the numbers from 2022 to 2024. It is encouraging that Alibaba has managed to increase its ROIC in the past two years, despite still being below 10%. I believe that ROIC will increase in the future, and so does the management as they have mentioned that "our robust balance sheet positions us well to strategically reinvest our cash flows to foster growth and strengthen leadership in core businesses, thereby improving future returns on invested capital." Hence, I expect that we will see an incremental increase in ROIC over the next couple of years.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. Alibaba has managed to grow its equity every year in the past ten years, which is encouraging. The year-over-year increase has been lower than usual over the past three years, which is due to the many challenges that Alibaba has faced. However, I think it is encouraging that the company managed to grow its equity at all. Thus, I find these numbers very encouraging.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Alibaba has managed to deliver positive free cash flow every year in the past ten years. Free cash flow reached a record high in fiscal year 2021 but significantly declined in 2022 as the company faced macroeconomic challenges and lockdowns. Alibaba managed to increase its free cash flow, reaching its second highest point in fiscal 2023 before decreasing again in fiscal 2024. However, it is worth noting that Alibaba still managed to deliver its third-highest free cash flow ever in 2024. Nonetheless, I would like to see an increase again in fiscal year 2025. The levered free cash flow margin hasn't reached pre-pandemic levels and hit its second-lowest point in fiscal year 2024. This is something that management is focused on improving in the future. The free cash flow yield is higher than it has ever been, indicating that the shares are trading at very attractive levels, but we will revisit that later in the analysis.

Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. We do this by dividing the total long-term debt by current earnings. Having done the calculations on Alibaba, it shows that Alibaba can pay off its debt in 1,78 years. This is well below the requirement of three years. Thus, debt is not a concern for me as an investor in Alibaba.

For those serious about investing, a Seeking Alpha subscription can be a game-changer. It offers comprehensive financial data, transcripts, market news, quant ratings, and in-depth analyses—everything you need for informed investment decisions. I use Seeking Alpha daily and find tremendous value in my subscription. Right now, you can save $25 on your first year of a premium subscription by signing up here or clicking on the picture below. Plus, you’ll get a 7-day free trial to explore all the features and see if it’s as valuable to you as it is to me.

Important Note: The price of Seeking Alpha Premium will increase to $299 starting September 16th. However, I’ve arranged an exclusive extension of the current introductory price of $214 until October 1st. By signing up before then, you'll also lock in a renewal rate of $239, saving you from the full $299 price. Don’t miss out—secure your rate today by clicking here or on the picture below.

Like with all other companies, there are some risks associated with investing in Alibaba. One risk is competition. According to Alibaba, they face competition principally from established Chinese internet companies, global and regional e-commerce players, cloud computing service providers, logistics service providers, and digital media and entertainment providers. These competitors generate significant traffic and have established strong brand recognition, robust technological capabilities, and significant financial resources. Alibaba competes with these companies to attract, engage, and retain consumers, merchants, brands, retailers, marketers, and publishers. Management has mentioned that there's been very intense competition in China's domestic e-commerce market over the past years. For instance, Alibaba's largest business unit, Taobao Tmall Commerce Group, is facing competition in China, particularly from PDD Holdings and JD.com. PDD has been gaining market share in 2023 and continues to grow rapidly. This has raised concerns that increasing competition will lead to price wars, which could negatively impact Alibaba's profit margins. Alibaba's management has previously stated that they have no intention nor need to participate in price wars. However, if PDD continues to grow and JD continues to lower their prices, they may not have a choice. Furthermore, Alibaba may also face increased competition from international players if these players gain greater access to the China market. Low Chinese consumption. Alibaba is dependent on domestic Chinese consumption, and over the last couple of years, many factors have kept the Chinese consumer from spending. First, it was the pandemic and lockdowns that dampened Chinese consumption, and later, there has been some turmoil in the Chinese real estate sector, which has affected domestic Chinese consumption. Chinese officials have made it a priority to boost domestic consumption. However, Chinese households still have more cash in the bank than ever before. Alibaba's management has mentioned that the willingness of Chinese consumers to spend depends on consumer confidence. While they have seen some small improvements through the calendar year 2024, it is probably still too early to tell if Chinese consumer confidence is high enough to boost the willingness to spend rather than save the money in the bank, because the macro environment is still broadly affected by the property sector downturn. The final risk is the risk of delisting from the U.S. stock exchange. There are several ways in which Chinese stocks can be delisted and American investors can be banned from investing in Chinese companies. First, there are two executive orders issued by Donald Trump. The first one is titled "Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies." It doesn't seem plausible that a company such as Alibaba will fall under this executive order, as no e-commerce companies have made the list compiled by the U.S. Department of Defense. The second is "Executive Order on Addressing the Threat Posed by Applications and Other Software Developed or Controlled by Chinese Companies." This is a significant threat, and it was this executive order that was used to blacklist Alipay. Nothing suggests that this executive order will be used against Alibaba, but future developments are uncertain. Additionally, there is the "Holding Foreign Companies Accountable Act." This act means that the SEC can request to inspect audit papers for any company listed in the U.S. If the SEC does not receive the audit papers within three years of their request, the company will be delisted. However, the PCAOB has been in Hong Kong to inspect papers, and it seems like there is progress, even though it still isn't confirmed whether Chinese companies comply. Alibaba has hinted that they do comply, but it is not yet official. Finally, there is the risk of China banning the "VIE structure," which would require Chinese companies to delist. However, nothing currently suggests that this is going to happen, as the CSRC has stated: "Companies with a VIE structure that meets the compliance requirements can go overseas for listing." This statement indicates that they do not intend to ban the VIE structure anytime soon, but political decisions can change rapidly.

There are also plenty of reasons to invest in Alibaba. One is the Taobao and Tmall Group. The Taobao and Tmall Group continues to be the cash cow of Alibaba. Management has mentioned that the Taobao and Tmall Group has continued to execute its user-first strategy by creating a system for brands, merchants, and industrial belts to operate efficiently and to meet the diverse needs of China's domestic consumers through a shopping experience that offers quality products at attractive prices supported by exemplary service. This strategy has resulted in tangible progress, strong growth in quarterly buyers, and increased purchase frequency, driving robust double-digit growth in gross merchandise value (GMV). For fiscal year 2025, management expects the Taobao and Tmall Group's GMV will gradually return to healthy growth as the platform's overall shopping experience continues to improve. Furthermore, Alibaba will be launching monetization products for the Taobao and Tmall Group. They will introduce a 0,6% service fee for merchants on their Taobao and Tmall e-commerce platforms, which will boost Alibaba's earnings. Cloud and AI. Management wants to change the cloud business and is committed to its strategy of focusing on high-quality revenues from increasing public cloud adoption while reducing low-margin project-based contracts. As Alibaba reduces its low-margin project-based contracts, it should result in faster revenue growth and higher margins. Management is also focused on AI and mentioned that AI-related revenue accelerated and continued to record triple-digit growth year-over-year from fiscal year 2023 to fiscal year 2024. They believe that this wave of Generative AI-driven technological innovation is in the early stages of the industry cycle, meaning they see a lot of runway for this part of their business. Management has also combined cloud and AI initiatives and highlighted that their open-source model "Tongyi" is the number one top open-source model in the Chinese-speaking world and the most widely adopted. When developers use Alibaba's open-source model in their development environment, it becomes a natural choice for them to choose Alibaba Cloud for deployment due to its high cost efficiency and familiar environment. This synergy between AI and cloud services is just one example of how AI can drive more cloud customers in the future. Buybacks and dividends. Alibaba has increased cash returns to shareholders. Alibaba repurchased a total of about 1,25 billion ordinary shares, equivalent to 156 million ADS, for a total consideration of $12,5 billion in fiscal year 2024. This repurchase reduced outstanding shares by 5,1% in fiscal year 2024. The repurchase program is still running until fiscal year 2027, with $30 billion remaining. Additionally, Alibaba has started paying dividends. For fiscal year 2024, Alibaba paid an annual cash dividend of $1 per ADS and a one-time extraordinary cash dividend of $0,66 per ADS, distributing proceeds from the disposition of certain financial investments. Through a combination of share repurchases and cash dividends, Alibaba returned about $16,5 billion to shareholders in fiscal year 2024, up from $13,4 billion in fiscal year 2023. Management has stated their commitment to returning value to shareholders and will continue to execute its capital return programs.

If you trade stocks frequently, you can boost your results with VIP trading indicators. These tools are specifically designed to simplify your trading decisions and help you trade more profitably. Getting started is easy and affordable, with a cost of just $9. Plus, there’s a 30-day money-back guarantee, so if you don’t find value in the first 30 days, you can simply request a refund.

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.

I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 4,33, which is from fiscal year 2024. I have selected a projected future EPS growth rate of 15%. (Finbox expects EPS to grow by 26,3%, but I use 15% as the highest rate.) Additionally, I have chosen a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on the fact that Alibaba has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $129,90. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Alibaba at a price of $64,95 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 25.288, and capital expenditures were 4.444. I attempted to review their annual report to determine the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 3.111 in our calculations. The tax provision was 3.112. We have 2.507 outstanding shares. Hence, the calculation will be as follows: (25.288 – 3.111 + 3.112) / 2.507 x 10 = $100,87 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Alibaba's Free Cash Flow Per Share at $8,31 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $131,18.

I believe that Alibaba is a great company that has delivered a high return on invested capital (ROIC) when not affected by COVID lockdowns and macroeconomic headwinds. We don't have much information about management, but I usually prefer it when founders or co-founders serve as CEOs. They are typically driven to grow the business. I also appreciate that the new CEO has been very vocal about prioritizing AI, as it has the potential to significantly impact businesses in the future. Alibaba is facing increased competition as PDD continues to grow and JD continues to lower their prices. Thus, competition is more intense than it has ever been before for Alibaba and serves as a long-term risk. Alibaba depends on domestic Chinese consumption as the Taobao and Tmall Group is by far its largest segment, while its "All Others" segment also depends on domestic consumption. As long as consumer confidence is low in China, it affects Chinese consumers' willingness to spend, which affects Alibaba. There are also some risks regarding Alibaba being delisted from the U.S. stock exchange, and while the company in that case will continue to be listed in Hong Kong, it is impossible to predict what consequences it would have for the company. The Taobao and Tmall Group is the cash cow for Alibaba and management expects it will continue to grow, and the 0,6% service fee for merchants will boost profitability for this segment. Cloud and AI is the future and Alibaba has a plan to increase margins for its cloud segment by reducing low-margin project-based contracts. Management also wants to leverage its open-source language model, which is the best in the market, to gain customers. Finally, Alibaba is shareholder-friendly as they have started to pay dividends and have ramped up their buyback program while shares are trading at a low valuation. I already have a full position in Alibaba, but if I didn't, I would be happy to buy shares below the Ten Cap price of $100, which would give me a 50% discount on intrinsic value on two out of three calculations.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to increase my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.

I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

Some of the greatest investors in the world believe in karma, and to receive, you will have to give. If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to the international tiger project. There are only few tigers back in Sumatra, and they need all the help they can get. If you have a little to spare, no matter how little, I would appreciate it if you would donate a little here. Thank you.