Will AI Ignite Alibaba Stock?

Alibaba Group (NYSE: BABA) stock has been in the headlines recently thanks to the company’s new artificial intelligence developments. Of all Chinese AI developers, Alibaba Group is the AI solutions development front-runner.

This jump on the AI bandwagon sent the stock soaring about 12% in the past three months with analysts now expecting the stock to surge even higher, by as much as 30% in the near term.

Still, the currently trades at 9.67x forward non-GAAP earnings, that’s nearly 40% below the industry average. So, what’s happening with Alibaba stock?

Get To Know Alibaba

Alibaba is one of the largest, most popular global enterprises. Originally, it was solely an online e-commerce marketplace, but it has gradually expanded its offerings to include cloud computing, digital media, and entertainment. It features three primary divisions:

• Alibaba Taobao: China’s largest online shopping platform
• Tmall: A dedicated platform for branded stores and retailers
• AliExpress: An international e-commerce and cloud-computing site hosted in the Alibaba Cloud.

The company stands out has having the record in 2014 for the then-largest IPO in history at $25 billion. Since then it has grown like a weed and now has a sharp focus on AI.

Hefty Investment in Artificial Intelligence 

Today, Alibaba is one of China’s major artificial intelligence developers.

Alibaba built its large language model, Tongyi Qianwen, in 2023. Alibaba’s leadership, including CEO Eddie Wu and others, has stressed the company’s AI future.

Alibaba’s Qwen models (Tongyi Qianwen, but namely Qwen2-72B-Instruct) outperformed their Chinese rivals to become the third-best generative AI model in the world, coming in just behind OpenAI’s ChatGPT (Version GPT-4o) and Anthropic’s Claude (Version 3.5 Sonnet).

The clear strategy here is to incorporate AI into Alibaba’s divisions to support further efficiencies, whether in marketing or customer acquisition.

Alibaba’s international e-commerce unit uses generative AI tools for translation, content writing, and customer service issues such as product returns for cross-border sellers. Vice President and Head of Artificial Intelligence, Kaifu Zhang, expressed optimism about Alibaba’s AI future despite recent and ongoing tensions between China and the United States.

Management is also focusing on extending cloud services globally, as the head of its overseas branch stressed AI products as the progenitors of further advancement.

Recent company announcements include the availability of its cloud computing offerings in Mexico and plans to open new data centers in Malaysia, Thailand, and South Korea over the next three years.

Alibaba Cloud has recorded moderate success since going global in 2015. Amazon, Microsoft, and Google corner this market by about 67%, while Alibaba has amassed around 5% of the global cloud market share, as estimated by Synergy Research Group.

Nevertheless, in China, Alibaba controls 39% of the cloud services market and is one of Asia’s key players in the space.

Is Alibaba Finally Turning Around?

Alibaba has faced several issues in recent years, including weakness in the domestic market and regulatory pressures, leading to a sharp decline in share price.

However, considering the ongoing recovery of the Chinese economy and the company’s core strategies, Alibaba is perhaps an overlooked stock at this time.

A positive catalyst is already evident that could drive the share price higher. Significant GMV growth has been observed in China and the international commerce businesses, including accelerated customer numbers and cloud computing revenues tied to its AI products.

The company’s revenues came in at RMB941.17 billion ($130.35 billion) for FY ending March 31, 2024, which was an increase of 8% year-over-year.

Adjusted EBITA increased 12% year-over-year to RMB165.03 billion ($22.86 billion). Also, the bottom line net income was RMB71.33 billion ($9.88 billion), an increase of 9% from FY 2023.

Alibaba appears to be gradually regaining lost ground and partnerships have been helpful in making progress too. For example, it has deepened ties with LVMH, the French luxury goods firm using Alibaba’s AI solutions for its Chinese business.

Management has also been making strides to improve marketplaces like AliExpress and Lazada after the reorganization of its international e-commerce unit into a standalone business, Alibaba International Digital Commerce Group.

The standalone conglomerate serves 300 million consumers annually and hosts over one million merchants worldwide. This segment may become one of the key drivers of Alibaba’s future growth.

Will AI Help Alibaba Stock?

Alibaba’s AI models, called Tongyi Qianwen, have ranked just behind OpenAI, and third in the world and so have the potentially to significantly improve the stock’s returns in coming years.

That line of thinking appears to be in line with the analysis of Wall Street which has a fair value price target of $107 per share on the stock.

There is an awful lot to like about Alibaba at this time beyond AI. For one, management has been buying back shares, creating a support under the stock price.

Ten analysts have revised their estimates higher for the upcoming quarter, too, suggesting a shift in sentiment back to a positive leaning for Alibaba.

The company’s war chest of cash on the balance sheet that features $30.1 billion is further evidence that this is a stock with enormous optionality to capitalize on new technologies and can spend liberally to attract top talent in the AI sector.

So too are free cash flows of $2.9 billion last quarter enormously positive. And best of all, trading at just a P/E of 20x with 5-year net income growth forecasts to come in at 19%, the future appears much brighter for shareholders than the past half decade has been.  

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.