BABA | Is Alibaba the Next Big AI Powerhouse ?

BABA's Strong Value Proposition and Growth Potential

Alibaba presents undeniable deep value opportunities, thanks to its diverse capabilities spanning e-commerce, logistics, cloud computing, AI, autonomous driving, and fintech. This broad expertise may also explain why Apple has partnered with BABA’s Qwen2.5-VL model in China, complementing its global collaboration with OpenAI

Qwen2.5 has already demonstrated superiority over other leading AI models, including DeepSeek, OpenAI’s GPT4o, Anthropic’s Claude 3.5 Sonnet, and Google’s Gemini 2.0 Flash. Despite the recent rally fueled by Apple’s endorsement, BABA still holds significant upside potential, with its stock remaining undervalued.

An Undervalued Opportunity for Investors

In a previous analysis of Alibaba, we highlighted its strong recovery potential, supported by improving US China relations and favorable policy developments expected in 2025. BABA’s powerful AI capabilities, international e-commerce expansion, and robust free cash flow generation reinforce its long-term investment appeal.

Since our last coverage, the stock has surged by 40%, far outperforming the broader market’s 2.9% gain and outpacing many of its industry peers. This growth is partly due to improving geopolitical sentiments, particularly signals of a softer stance from US leaders and China’s top diplomats.

Despite ongoing concerns about emerging AI competitors like DeepSeek, we believe the market has overreacted. BABA's Qwen2.5-VL model has proven itself against major rivals, making it a formidable AI player. Apple’s decision to incorporate BABA’s AI for iPhones in China further solidifies its leading position in the region. Given that China accounts for over 17% of Apple’s revenue, this partnership could unlock new growth opportunities for both companies.

Moreover, BABA’s cloud division continues to expand, with revenue hitting $4.21 billion in Q2 FY2025, reflecting a 15.3% quarter-over-quarter and 11.3% year over year growth. AI related revenues have seen triple-digit growth for five consecutive quarters, further emphasizing the company’s strong position in the AI-driven cloud computing sector.

Growing Investments in AI Infrastructure

BABA’s rising capital expenditures, reaching 46.36 billion yuan over the last 12 months (a 151.8% increase), underscore its commitment to AI infrastructure. Despite US export bans on Nvidia (NVDA) chips, Chinese researchers have achieved performance breakthroughs using domestic GPUs, suggesting BABA will remain competitive in cloud computing.

Valuation and Investment Outlook

BABA’s stock remains attractively priced, with a forward price-to-earnings (P/E) ratio of 13.76x, well below its pre-crackdown five-year average of 28x. While the stock has recovered from its December 2023 lows, improving investor sentiment could drive further gains.

Currently, BABA is trading in the $124 range, retesting its 2022-2024 highs. With an estimated fair value of $180 and a bullish target of $300, the stock has substantial upside potential. However, geopolitical uncertainties, tariff tensions, and broader market volatility could create near-term headwinds. at this point of my trading journey I can predict everything and everyone but Trump!