Why I'm Still Holding Alibaba: A Detailed Look at the Journey So Far

Along the way, some of my shares were taken due to covered calls, but I've held onto the rest. In the last 52 weeks, Alibaba’s low was $66 per share, and despite a lot of criticism, I stayed invested.

Alibaba has faced a lot of scrutiny, largely due to its location in China and the fears surrounding the country. Yet, as of now, Alibaba’s stock has skyrocketed to a 52-week high of $116 per share. What's interesting is how news tends to follow the stock price—when Alibaba was over $300 per share, no one mentioned concerns about it being an ADR (American Depositary Receipt) or how you technically don’t own the company directly. These issues only seemed to surface when the stock started to fall, and concerns like Taiwan’s situation became bigger talking points.

Despite these fears, Alibaba has made a strong comeback. The stock is up 55% in the last six months, 48% in the last three months, and 50% year-to-date. Does this mean I’m right about Alibaba? Not necessarily. I received messages from people congratulating me for being "right," but I caution against drawing conclusions too soon. Just because a stock goes up 30% doesn’t mean I’m right, just like a 30% drop wouldn’t mean I’m wrong. The goal is to focus on the fundamentals of the company, not get caught up in short-term price movements.

When analyzing Alibaba, I’ve always focused on its fundamentals. In past videos, I questioned whether the growth story justified the price people were paying when the stock was soaring. The key for any investor is to look at the fundamentals relative to the market price and decide if the investment makes sense. Stocks fluctuate a lot in the short run, but the real question is: when the fundamentals are strong, and the stock price drops, are you willing to buy?

Yes, I had concerns about China’s government, but when I look at the last 20 years, China has been moving toward more capitalist principles. Why would they reverse that? I also considered the average income in China and the growth potential that still exists. Even after a 50% run-up in Alibaba’s stock price, it’s still trading at only 14 times free cash flow. That’s after the recent rally! Over the last five years, Alibaba has averaged $20 billion in free cash flow, despite net income averaging only $14.5 billion.

Another key point: Alibaba has been aggressively buying back its shares. This shows management is smart—they recognize the stock is undervalued and are reducing the share count at attractive prices. Combine that with the fact that many major investors are now piling into the stock, and you can see why there’s potential here.

So where is Alibaba going in the next three or six months? I have no clue, and neither does anyone else. The key is to make investment decisions based on fundamentals, not short-term price movements. A lot of the stocks I’ve bought recently, like Nike and Starbucks, were picked because their sentiment shifted, and the prices dropped despite the companies' strong fundamentals. It’s the same with Alibaba.

Let’s dive into the details using our stock analyzer tool. First, let’s talk about Alibaba’s free cash flow. In the last year, it’s averaged $20 billion, even though net income was just $10 billion. Free cash flow is the key metric to focus on—it tells the real story. Even with all the fears and negativity surrounding Alibaba, the stock is still trading at a low price relative to its free cash flow. I love that their free cash flow exceeds net income, and while revenue growth hasn’t been explosive, it’s consistent.

Now, let’s look at the stock analyzer tool to project Alibaba’s potential. I did a 10-year analysis using a conservative 6% revenue growth rate, which is much lower than Alibaba’s past growth rates. I put in a 15% profit margin and 18% free cash flow margin to be conservative. Using these assumptions, the tool gave me an intrinsic value of $177 to $212 per share, significantly higher than the current price of $112.

In another scenario with more aggressive assumptions, I modeled 12-18% revenue growth and higher profit margins. The result was a range of $130 to $335 per share. These results show the potential upside Alibaba offers, even at conservative estimates.

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