Alibaba Group Holding Ltd. (BABA) has long been known as “the Amazon of China.” But now it’s gaining a reputation as something more than that – all while its stock trades at a massive discount, says Chris Preston, editor of Cabot Value Investor.
Through its “Alibaba Cloud” cloud computing platform that serves online businesses...Qwen, an AI assistant for its own e-commerce ecosystem...and T-Head, a chip subsidiary...Alibaba has become an Artificial Intelligence powerhouse. It accounts for 40% of the entire Chinese AI market, with the next-largest company having only a 14.8% share.
Alibaba Group Holding Ltd. (BABA)
Combined, Alibaba’s cloud computing offerings grew 45% in the latest quarter, with AI-related product revenue up triple digits for a 12th consecutive quarter. Having conquered the Chinese market, Alibaba is now looking to make its booming AI business a global entity. Germany, France, Hong Kong, Malaysia, and the United Arab Emirates are all being targeted for new data centers in an effort to compete with Amazon Web Services and other dominant global cloud computing giants.
Of course, all of these innovations and data center buildouts come with a cost. Capital expenditures were up 75% in the latest quarter, and that’s before the overseas expansion efforts go into overdrive. That ate into profits, with fiscal Q2 2027 net profits declining 75%. Yet normalized, non-GAAP earnings per share are expected to grow by 64% this year and by another 40% next year.
On top of it all, BABA shares have rarely been cheaper. They trade at 16.1x forward earnings estimates and 1.7x sales, and at barely more than a third of their 2020 peak. Record (and accelerating) sales and a cheap valuation are a great recipe for a bounce-back – especially for an emerging AI behemoth like Alibaba.
Recommended Action: Buy BABA.
