Alibaba’s AI Innovations Position it for Strong Future Growth

Alibaba Group BABA is establishing itself as a significant player in the artificial intelligence (AI) sector, showcasing impressive technological advancements and strong financial performance in its recent quarterly report. The company’s strategic focus on AI development and semiconductor technologies points toward an attractive investment opportunity for 2025.

The stock has surged by 89.1% over the past year, surpassing the performances of the Zacks Internet-Commerce industry, the Zacks Retail-Wholesale sector, and the S&P 500’s respective returns of 18.4%, 11.7%, and 9.1%.

1-Year Performance

Image Source: Zacks Investment Research

Advancements in AI Model Development

Alibaba’s affiliate, Ant Group, is making notable progress in AI model development, particularly in decreasing AI training costs. By effectively combining domestic and U.S. semiconductors, Ant Group has achieved a 20% reduction in computing costs for AI model training. This innovation minimizes dependence on a single chip supplier like NVIDIA Corporation NVDA.

This advance is particularly important given U.S. restrictions on the export of high-end semiconductors to China. Ant Group’s ability to utilize various domestic and international chips for AI training illustrates its adaptability and potential for technological innovation.

Strong Financial Results

The financial results for the December quarter reaffirm Alibaba’s strong market presence. The company reported consolidated revenues of RMB280,154 million (US$38,381 million), reflecting an 8% year-over-year growth. Remarkably, Alibaba’s operating income jumped by 83% compared to the same quarter last year, reaching RMB41,205 million.

The Cloud Intelligence Group was a highlight for Alibaba, as its revenues experienced a 13% year-over-year increase, with AI-related product revenues maintaining triple-digit growth for the sixth consecutive quarter. This consistent performance underscores the strength of Alibaba’s technological ecosystem.

Commitment to Open-Source AI Initiatives

Beyond AI development, Alibaba actively encourages open-source innovation. In January 2025, the company open-sourced Qwen2.5-VL, a multi-modal model, and released its flagship Mixture of Experts (MoE) model, Qwen2.5-Max. These advancements have shown leading results across various benchmarks.

The widespread adoption of the Qwen family of models is evident, with over 90,000 derivative models created on Hugging Face, distinguishing it as one of the largest AI model families worldwide as of January 31, 2025.

Diverse Business Growth

In addition to advancements in AI, Alibaba exhibits solid performance in various business segments. The Taobao and Tmall Group recorded a 5% revenue increase, while customer management revenues rose by 9%. The Alibaba International Digital Commerce Group saw a significant 32% year-over-year revenue increase, driven by vigorous cross-border business activity.

The company is also making strategic investments to enhance operational efficiency. During the quarter, Alibaba successfully optimized its balance sheet through divestments, share buybacks, and debt management, repurchasing 119 million ordinary shares for $1.3 billion, reflecting its confidence in intrinsic value.

Despite this success, Alibaba’s leading e-commerce position in China faces challenges from global competitors like Amazon AMZN and eBay EBAY. Moreover, Alibaba’s growth in the global cloud market has been impeded by intense competition from major players such as Amazon, Microsoft, and Google.

Investment Outlook for 2025

Looking ahead to 2025, Alibaba presents an appealing investment proposition. The company’s multifaceted approach to technology, especially in AI and cloud computing, paired with diverse revenue streams and disciplined financial management, positions it positively in the marketplace.

Continuous growth in AI-related products, successful development of advanced language models, and a strategic approach to semiconductor challenges indicate that Alibaba is not just adapting to the technological landscape but actively influencing it.

The stock benefits from solid financial fundamentals. With an 8% revenue increase, an 83% rise in operating income, and ongoing investments in leading-edge technologies, Alibaba appears well-equipped for sustained growth.

The Zacks Consensus Estimate for fiscal 2025 revenues stands at $138.29 billion, suggesting a year-over-year growth of 5.97%. Additionally, the Zacks Consensus Estimate for fiscal 2025 earnings has risen by 0.9% over the last 30 days to $8.80 per share, indicating positive market sentiment regarding Alibaba’s growth potential.

Image Source: Zacks Investment Research

Find the latest earnings estimates and surprises on Zacks earnings Calendar.

Currently, Alibaba is trading at a discounted forward 12-month Price/earnings ratio of 12.52X, significantly lower than the industry average of 21.4X and the median of 14.21X. This valuation metric suggests that BABA’s stock is considerably undervalued compared to its peers, trading at less than half the average industry P/E ratio. The lower-than-median forward P/E implies this is an attractive entry point for investors, considering that the stock appears undervalued despite robust fundamentals.

BABA’s P/E F12M Ratio Illustrates Discounted Valuation