David Hay — Portfolio Update #288: Alcoa (AA) up ~50% rated Hold; Alibaba (BABA) moved to Hold
"It's all about tension." A fall-'25 pick (Alcoa) has run ~50% on four-year-high aluminum — but the same AI buildout that lifts aluminum demand raises smelting's biggest cost. And the China-AI champion (Alibaba) gets downgraded after its AI spend broke the near-term profit story.
One-line take: A two-name portfolio review. Alcoa (AA) — recommended 10/31/25, now ~$54, up ~50% — is rated HOLD. It's an integrated aluminum major and a physical-layer electrification play (like Hudbay in copper): aluminum just hit a four-year high on the Strait-of-Hormuz supply disruption (~3.5M tons of 2026 output at risk) layered on structural EV/grid/data-center demand. The core tension is "long aluminum, short power" — smelting is among the most electricity-intensive processes on earth, so the same AI buildout that lifts aluminum demand raises Alcoa's biggest input cost. Fortress balance sheet, but the metal price is cyclically elevated and partly geopolitical; triangulated fair value is ~$52-55 now (≈ the price) vs ~$36-42 mid-cycle, with the Street's ~$80 pure leverage to aluminum holding near peak. HOLD, sized for cyclicality; add on weakness toward the low-$40s (next print July 15). Alibaba (BABA) is moved from Buy to HOLD (a downgrade): ~$95 (a 16-month low), down ~⅓ from entry. Cloud (+38-40%) and Qwen are strong, but the cost broke the thesis — first operating loss since early 2021, non-GAAP net income −80%, FCF negative on ~$56B AI/cloud capex (China's version of the hyperscaler capex-vs-returns recalibration), plus the Jun-25 Anthropic "distillation attack" allegation that drove it to the low as ARK and Michael Burry sold. Cheap vs a $190-230 target ($70B net cash → ~$165B EV) but a longer, riskier hold. Norsk Hydro (NHYDY) — "the Alcoa of Europe," suggested Dec '25, up ~23% — is the held aluminum-sibling. Portfolio: AA and BABA both rated HOLD (Haymaker Trims/Holds); NHYDY held alongside.
1. Stocks & names mentioned
| Ticker | Name | Research | View | What he said | At |
|---|
| AA | Alcoa | QT · SA · STK · FA | Neutral | Rated HOLD after a ~50% run since the 10/31/25 pick (~$54). An integrated aluminum major (bauxite → alumina → smelting) and a physical-layer electrification play — "like Hudbay in copper." Aluminum is at a four-year high on the Hormuz supply disruption (~3.5M tons of 2026 output at risk) plus structural EV/grid/data-center demand. The tension: "long aluminum, short power" — power-intensive smelting means the AI buildout that lifts aluminum demand lifts its biggest input cost. Fortress balance sheet, but cyclically-elevated/partly-geopolitical peak prices; fair ~$52-55 now vs ~$36-42 mid-cycle. HOLD sized for cyclicality; add on weakness toward the low-$40s (next print July 15). | read |
| BABA | Alibaba Group | QT · SA · STK · FA | Neutral | Moved from Buy to HOLD (a downgrade). ~$95 (a 16-month low), down roughly a third from entry. Cloud +38-40% and the Qwen ecosystem are strong, but the cost broke the thesis: first operating loss since early 2021, non-GAAP net income −80%, FCF negative on ~$56B AI/cloud capex (China's version of the hyperscaler capex-vs-returns recalibration), plus the Jun-25 Anthropic "distillation attack" allegation (~25,000 fraudulent accounts) that drove it to the low as ARK and Michael Burry sold. Cheap vs a $190-230 target ($70B net cash → ~$165B EV) but a longer, riskier pick. Keep a core only for long-term China-AI optionality; add once profitability stabilizes, cut if China macro/legal deteriorates. | read |
| NHYDY | Norsk Hydro (ADR) | QT · SA | Neutral | Referenced as "essentially the Alcoa of Europe" — a low-cost aluminum producer on cheap Norwegian hydro power. Suggested in Dec '25 as a place to recycle AA trim proceeds; up ~23% since (at one point +60% from the tout). A held aluminum-sibling to AA, carried along in the same electrification-demand theme. | read |
"View" is Haymaker's stance in this post (Positive / Neutral / Negative), not a price rating; both rated names (AA, BABA) are HOLDs in this update, and NHYDY is referenced as a held sibling. Referenced only: Hudbay (the copper analogue for the "physical-layer electrification" framing) and Anthropic (the accuser in the distillation-attack allegation) live in the talking points; aluminum (four-year high), the Strait-of-Hormuz supply hit (~3.5M tons), and the long-aluminum/short-power tension feed the master macro tables, not as tickers. Research: QT Qualtrim · SA Seeking Alpha · STK Stock Analysis.
2. Talking points
Alcoa — the setup: a ~50% winner, now "all about tension"
- Recommended 10/31/25 on the view that aluminum's essential role in EVs, energy storage, AI-infrastructure build-out and other green tech was severely undervalued. Alcoa is one of the world's largest integrated producers (bauxite → alumina → smelting across Australia, Brazil, Canada, Iceland, Spain, the U.S., plus a 25% stake in the Ma'aden Saudi JV).
- Framed like Hudbay in copper — a physical-layer play on the build-out: aluminum is the lightweight conductor of electrification (EVs, grids, packaging, construction, increasingly data centers). Conviction was high enough that Haymaker suggested recycling AA trim proceeds into Norsk Hydro (NHYDY) — "the Alcoa of Europe" on low-cost Norwegian hydro power — in Dec '25 (up ~23% since, +60% at one point).
- As a cyclical industrial in geopolitical turbulence, AA has roller-coastered ~$28 → $84 → $54 inside a year. The question — is the ~36% pullback an entry or a warning? — nets to "somewhere in between," and the reason is tension.
Alcoa — the bull case: four-year-high aluminum + a secular tailwind
- Aluminum prices recently hit their highest in over four years on Middle-East supply disruptions and the Strait-of-Hormuz standoff (estimated to affect up to 3.5M tons of 2026 output) — acute tightness layered on a structural demand story (EVs, grid, packaging, data centers). Alcoa is a direct, high-beta beneficiary.
- Financials swung hard to profitability in 2025 (revenue $12.83B, earnings north of $1.2B). Q1 2026: aluminum segment strong on higher LME + Midwest premium, net income $425M, adjusted EBITDA $595M (+~13% q/q); San Ciprián smelter restart completed; deleveraging (prepaid $219M of 2028 notes, ~$2.8B cash, retired ~$1.6B preferred, ~$400M net cash) — a fortress balance sheet, with 2026/27 FCF projected to "double and double again." Section 232 tariffs support the Midwest premium. Consensus target ~$80 (~50% above); UBS upgraded to Buy at $80; 14 analysts Buy.
Alcoa — the catch: long aluminum, short power
- Aluminum smelting is one of the most electricity-intensive processes on earth; power is the dominant variable cost. So Alcoa is simultaneously long the aluminum demand AI/electrification create and short the power the same buildout makes scarce and expensive — the exact thesis that makes Haymaker constructive on the power complex is a cost headwind for Alcoa's smelters.
- Management hedges much of it (<1% of smelting electricity exposed to spot; long-term contracts; Spanish gas hedged through 2027) — so the exposure is managed, not naked — but the structural point bites as contracts roll. Near-term costs already deteriorating: a ~$60M unfavorable Q2 alumina-segment impact (higher refinery costs, cyclones, higher Middle-East-tied energy prices) sent the stock down ~10% on the revision.
Alcoa — cyclical + geopolitical risk
- The alumina segment (half the integrated business) posted negative segment EBITDA in Q1; the "strong quarter" was the aluminum half carrying a struggling alumina half. Operating cash flow was negative in Q1 at $(179)M; earnings benefited from one-time mark-to-market gains on the Ma'aden stake.
- The elevated aluminum price underpinning the bull case is partly geopolitical — if Middle-East tensions ease and the 3.5M-ton supply threat recedes, the premium deflates and AA's price-levered earnings fall with it. China's perennial aluminum overhang and two-way tariffs (~$35M Q2 cost on Canadian imports) round out the risk. A high-beta name; size accordingly.
Alcoa — valuation: the cyclical multiple mirage
- At ~$54 the P/E looks low on 2025-26 earnings, but those are cyclically elevated on four-year-high aluminum — the classic cyclical mirage (Haymaker prefers Price/Sales on cyclicals; AA's P/S is on the high side). EV/EBITDA ~7× on the ~$2.2B run-rate, but ~9-10× on mid-cycle EBITDA of ~$1.6-1.8B — cyclical smelters typically trade 5-7× mid-cycle. Cash flow is weaker than earnings imply (2025 FCF $594M ≈ 4.2% yield, but Q1 2026 FCF −$298M; ~$300M+/yr environmental/ARO remediation drags).
- Triangulated fair value is almost entirely a function of the aluminum price: mid-cycle EBITDA (~$1.7B at 6.5-7.5×) → ~$36-42/share (below current); current elevated conditions justify ~$52-55 (≈ where it trades); the bull case (aluminum holds near peak) → ~$66; the Street's ~$80 needs prices to rise further. So at $54 it's fairly valued on cyclically elevated prices — and the ~49% upside to consensus is pure leverage to aluminum staying at four-year highs.
Alcoa — bottom line: HOLD, sized for cyclicality
- A well-run integrated major with a genuine electrification-demand tailwind, at a more reasonable level after the ~36% pullback, with real analyst support — but a high-beta cyclical on partly-geopolitical peak prices, a weak alumina segment, deteriorating near-term costs, soft cash flow, and the structural irony that the AI-power buildout it benefits from on demand raises its costs on supply.
- Prudent to HOLD and add on weakness, not back up the truck: take a small position for the exposure, size for volatility, and reserve the bulk for confirmation costs are stabilizing (the July 15 print) or a deeper pullback toward the low-$40s. Rated HOLD, sized for cyclicality.
Alibaba — moved to HOLD: the AI spend broke the near-term profit story
- Recommended late February as the cheap China-AI-champion re-rating play; it has gone against Haymaker — ~$95 (a 16-month low), down ~⅓ from entry, ~25% of that loss in the past month. The core engine works: Alibaba Cloud growing ~38-40%, AI products ~30% of external cloud revenue, the Qwen open-source ecosystem among the most widely deployed globally.
- But the cost broke the thesis: first operating loss since early 2021, non-GAAP net income −80%, FCF turned negative on ~$56B in AI/cloud spend — China's version of the capex-vs-returns recalibration hitting U.S. hyperscalers, stacked on China's weakest GDP target in decades, chip-export risk, and a broad China-ADR selloff.
- On June 25 Anthropic (the maker of Claude) publicly accused Alibaba of the largest known "distillation attack" (~25,000 fraudulent accounts allegedly used to extract model capabilities); the WSJ-reported allegation pushed BABA to its 16-month low as ARK Invest and Michael Burry disclosed selling into the weakness.
- Net: thesis partially intact and the stock is cheap against a $190-230 target ($70B net cash cuts EV to ~$165B — "a throw-away valuation for China's Amazon + Google combined"), so don't dump into a capitulation alongside forced sellers — but the profitability collapse, macro/geopolitical headwinds and the new distillation overhang make it a longer, riskier pick. Moved to HOLD: keep a core for long-term China-AI optionality if you can stomach unquantifiable geopolitical/legal risk; risk-averse readers add only once profitability stabilizes, and cut if China macro or the legal situation deteriorates further.
3. In plain English
A jargon-free summary of the thesis behind each name — what it is and why he holds that view. (Plain-language companion to the table above; renders on each ticker's consolidated page.)
AA — Alcoa Neutral (Hold)
Alcoa is one of the world's biggest aluminum makers — it digs the ore, refines it and smelts the metal. Aluminum is a core "electrification" material (cars, power grids, packaging, and now data centers), and its price just hit a four-year high because Middle-East tensions around the Strait of Hormuz threaten to knock out a chunk of 2026 supply. Haymaker recommended the stock in late October; it's since run about 50% to ~$54.
The clever-but-uncomfortable twist is that Alcoa is "long aluminum, short power": melting aluminum takes enormous amounts of electricity, so the very AI/data-center boom that drives aluminum demand also makes Alcoa's biggest cost — power — scarcer and more expensive. On top of that, today's high aluminum price is partly a geopolitical spike, so if Middle-East tensions cool the price (and Alcoa's earnings) could fall. The cheap-looking P/E is a trap because it's measured on peak-cycle earnings; on more normal "mid-cycle" prices the stock is worth roughly $36-42, versus ~$52-55 today. So Haymaker rates it a HOLD — keep it, but it's no longer a bargain; add only on a pullback toward the low-$40s, and watch the July 15 earnings for whether costs are stabilizing.
BABA — Alibaba Group Neutral (Hold — downgraded from Buy)
Alibaba is China's giant of e-commerce and cloud computing — often called "China's Amazon and Google rolled into one." Haymaker bought it in February as a cheap way to own a Chinese AI leader. The business engine is actually working: its cloud unit is growing ~38-40% and its open-source "Qwen" AI models are among the most widely used in the world.
The problem is the bill. To compete in AI, Alibaba is spending about $56 billion on chips and cloud — so much that it just posted its first operating loss since early 2021, profit (excluding one-offs) fell more than 80%, and it's burning cash instead of generating it. It's the same "we're spending huge sums on AI and the payoff isn't here yet" story hitting U.S. tech giants, but worse because of China's slowing economy and chip-export risks. Then on June 25 Anthropic (the maker of Claude) publicly accused Alibaba of a giant "distillation attack" — allegedly using ~25,000 fake accounts to copy AI-model capabilities — which knocked the stock to a 16-month low as big investors (ARK, Michael Burry) sold. The shares are genuinely cheap against analyst targets, so Haymaker won't sell into the panic, but the broken profits and new legal cloud make it riskier and slower. So it's downgraded from Buy to HOLD: keep a core position if you can tolerate the uncertainty, add only once profits stabilize, and cut if China's economy or the legal situation gets worse.
Summary derived from the paid Haymaker newsletter (text in transcript.txt) for personal study. Not investment advice. © Haymaker / David Hay for source material.