BUY ALIBABA STOCK Ahead of Earnings?! - BABA Stock Analysis

Added: 2026-05-13

[00:00:00]Alibaba reports earnings tomorrow, and this might be one of the most important earnings reports in years for the stock.

[00:00:07]Because depending on just a few assumptions, Alibaba is either significantly undervalued today or fairly priced with limited upside left.

[00:00:16]And the strange thing is, both cases can be justified using the same financial data. So, let's break it down. Right now, the real question isn't whether Alibaba is a good company. It's this. Is Alibaba still a high-growth AI and cloud story, or just a mature e-commerce business trapped under China discount?

[00:00:38]Because your answer to that completely changes the valuation. Back in 2020, Alibaba was one of the most valuable tech companies in the world. The stock reached around $309 per share as e-commerce and digital payments exploded during the pandemic. But after that, sentiment completely shifted. Between 2021 and 2023, investors started pricing in slowing Chinese economic growth, regulatory pressure, geopolitical tension between the US and China, and fears around delisting risk. This led to what became known as the China discount.

[00:01:17]And that's actually when I personally started buying Alibaba under $80 per share because the valuation didn't match the fundamentals in my view. Then something changed. In 2023, Alibaba announced a major restructuring, splitting into six business units to unlock value and improve efficiency. And from 2024 onward, the story shifted again. Instead of being just an e-commerce company, Alibaba started being re-rated as an AI and cloud infrastructure company. They announced more than $50 billion in AI and cloud investments. Cloud growth accelerated to around 36% in recent quarters and AI-related revenue reportedly saw triple-digit growth rates. So, the question now is, has the market already repriced this transformation or is it still early?

[00:02:11]Before we go deeper into the financials, I want to show you something important.

[00:02:16]Depending on my assumptions, my discounted cash flow model gives three different outcomes. Conservative case, around $80 per share intrinsic value.

[00:02:25]Base case, around 134.

[00:02:27]And bull case, around 208. And the current stock price is around $134 per share. So, at today's price, Alibaba could be anywhere from fairly valued to significantly undervalued. Now, let's understand why. Over the past decade, Alibaba's revenue has grown from roughly $14.8 billion to about $149.6 billion today. That's massive expansion, but growth has clearly slowed down in recent years. In fact, Alibaba hasn't consistently delivered double-digit revenue growth over the past 4 years, which is a major shift from its earlier phase. That slowdown is one of the main reasons the stock derated so heavily.

[00:03:10]But, there are early signs of reacceleration in specific segments. For example, cloud revenue grew 36% last quarter and AI-related products have shown triple-digit growth for multiple consecutive quarters. And that's important because the market is no longer valuing Alibaba as just e-commerce. Now, let's talk profitability. Alibaba's free cash flow peaked at around $28 billion in 2021.

[00:03:37]Since then, it has declined year over year, but this isn't necessarily weakness. It's investment. The company is aggressively reinvesting into AI and cloud infrastructure, which is currently compressing margins. Free cash flow margin has dropped from historical levels of between 10% to 20% down to around 5% to 6% today. So, the key question becomes, are we seeing temporary margin compression or permanent structural decline? One positive here is capital allocation.

[00:04:09]Alibaba has increased share buybacks significantly at lower stock prices.

[00:04:14]That means fewer shares outstanding, higher ownership per share, and long-term EPS potential. They also dividend currently around 0.7% although still relatively small. And importantly, Alibaba is financially strong. The company holds roughly $48 billion in cash and $41 billion in debt.

[00:04:35]So, the balance sheet is solid enough to support both buybacks and heavy reinvestment at the same time. So, when we combine all of these into a discounted cash flow model, we're essentially making three big assumptions. I made revenue growth assumptions between 4% and 8% annually over the next 7 years, that the average of profit margin and free cash flow margin between 8% and 14% and I assigned a P/E price to free cash flow at the end of the 7 years of 14, 16, and 18 and a slight share reduction from buybacks.

[00:05:05]This means that if my low assumptions occur, you would get a 1% annual return on your money, middle 10%, and high 18.3%.

[00:05:14]But if you want to make your own assumptions, I'm going to leave a link to a spreadsheet down below as well as to stock-analysis.com which is where I've shown all the stock data in this video. So, where does this leave Alibaba? I still believe there is meaningful upside from current levels, but the key uncertainty is whether Alibaba's massive AI and cloud investments will actually translate into sustained earnings growth over the next few years. And right now, that's still an open question. Personally, I have to also acknowledge a bias here because I previously bought Alibaba under $80 per share and sold above 150, which was a strong investment. But at current levels, I'm more cautious. For me to become more aggressive again, I would likely need to see a deeper pullback, potentially below $100 per share. I hope you found this video valuable. Let me know what you think about Alibaba stock in the comments, and I'll see you in the next one.