It was another turbulent day in the market, with Nvidia dropping 5% along with other stocks. Microsoft is investigating whether Deep Seek improperly obtained data for their AI system. OpenAI claims to have evidence that Deep Seek used their model to train a competitor. However, today's focus is on Alibaba, which has announced a new Quen model that outperforms fellow Chinese company Deep Seek on various benchmarks. Before diving into the article, it's worth noting that Alibaba's stock is up around 4% today, now trading at $100. This clip sets the stage for our episode.
Alibaba has just released the latest version of Quen, Quen 2.5. This development highlights the rapid evolution of the AI market. According to Alibaba, their new model outperforms Deep Seek's model across a range of industry-standard benchmarks. However, we should wait for engineers to test the new Alibaba model in real-world scenarios to verify these claims. Large language models often excel in specific areas, such as complex math computations or natural language processing, so it's important to see how Quen 2.5 performs in practice.
Initial information suggests that Quen 2.5 Max performs competitively against top-tier models from Microsoft-backed OpenAI and Meta Platforms. It also reportedly outperforms Deep Seek's V3 AI. Deep Seek recently claimed their model cost around $5.6 million to develop, a figure that remains unverified. While Nvidia is down 5%, Alibaba appears promising.
Alibaba has made bold claims about Qwen 2.5-Max, stating it outperforms OpenAI’s GPT-4o, Meta’s Llama-3.1-405B, and DeepSeek’s V3 model in most areas. Benchmarking results on Alibaba's GitHub page indicate that its instruct models, tailored for tasks like chat and coding, excel over these competitors.
Although Alibaba admits it can't directly compare Qwen 2.5-Max to proprietary models like GPT-4o and Claude 3.5-Sonnet, it positions Qwen 2.5-Max as a top-tier open-weight AI system, ready to compete with the industry's best.
Notably, Alibaba has not disclosed the production cost of Quen 2.5 Max, unlike Deep Seek. They also haven't made it open source yet, which could change in the coming days. This would require them to release information about the model's numerical parameters. Alibaba's stock is up 36% over the past year but only 177% over the last decade, still far from its all-time high of $37 nearly five years ago. Both Seeking Alpha and Wall Street consider it a buy, with Wall Street's rating at 4.46, close to a strong buy. Alibaba currently pays a dividend of around 2.08%.
The Domestic and Global Implications
The competition between Alibaba and DeepSeek highlights a broader trend in the AI industry: the emergence of Chinese tech companies as formidable players in the global AI arena. While Western firms like OpenAI and Google have traditionally led the field, Chinese companies are rapidly closing the gap. Alibaba’s Qwen 2.5 exemplifies how Chinese firms are not just catching up but also starting to lead.
Domestically, the rivalry is just as fierce. DeepSeek’s affordable, high-performance models have pushed established giants like Alibaba, Tencent, and Baidu to speed up their AI advancements. The launch of Qwen 2.5 is a direct response to DeepSeek’s rapid ascent, emphasizing the pressure on Chinese tech giants to remain competitive.
Globally, the stakes are high. As Chinese companies like Alibaba and DeepSeek continue to innovate, they are challenging the dominance of Western AI firms. This could result in a more balanced global AI landscape, with multiple players driving innovation and expanding the possibilities of AI.
BABA Earning Performance
Looking at Alibaba's performance, they expect growth quarter-on-quarter compared to last year. Historically, they have outperformed in two of the last four quarters, giving them a 50% track record. Their forward P/E ratio is 9.82, trading at a 38% discount compared to others in the sector. While some companies trade at a discount due to poor metrics, Alibaba might present a golden opportunity. They are trading 30% lower than their 5-year average across various metrics.
In terms of growth, Alibaba gets a D-minus, with growth over the last 12 months at 5%, above the sector but below their 5-year average of 20.3%. Future growth looks strong at 18.5%, well above the sector's 10.4% and their historical 12.7%. Profitability is solid, with a gross margin of 38%, in line with the sector. Cash from operations is high at $22 billion, well above the sector's $267 million, though lower than their 5-year average of $27 billion.
Institutional ownership is around 13.5%, with significant buying over the last year. However, recent quarters have seen more selling. Alibaba's free cash flow P/E is strong, supporting their 2% dividend. Sales growth has slowed, but the company has grown significantly over the last decade. Share buybacks have been minimal, with little change in shares outstanding since 2015. ROIC is around 10%, though inconsistent.
Operating and free cash flow margins are above industry minimums, despite some declines. Net debt to EBITDA is impressive, with zero debt across the board. Alibaba's balance sheet is strong, with cash rising from $20 billion in 2015 to $55 billion recently, far exceeding their total debt. Cash flow has also increased, from $6.6 billion to $22 billion over the last 12 months.
Compared to similar companies, Alibaba has performed well over the last year, up 38%. However, over the last five and ten years, performance has been poor. Past performance is not indicative of future results, but Alibaba has potential for improvement.
My valuation gives Alibaba an intrinsic value of $150, indicating 50% upside. With a 2% growth rate, the value rises to $172, and at 4%, just under $200. We use a conservative 0% growth rate, resulting in a $135 buy price, offering 30% upside. Wall Street's price target is $122, translating to 22% upside by the end of 2025. Always do your own due diligence and consider your risk tolerance when investing.
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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