Alibaba Group (NYSE: BABA) has been facing an uphill battle, with its stock plummeting over the past five years amidst various challenges, including the aftermath of COVID lockdowns, a slow Chinese economy, and fierce competition in e-commerce.
Despite these obstacles, a glimmer of hope emerges in the realm of artificial intelligence (AI) as Alibaba embarks on an ambitious journey to accelerate growth through innovation.
Breaking Ground with New Open-Source AI Models
Similar to other segments of its business, Alibaba’s cloud computing division has faced challenges in recent years, contending with heightened competition. The company made strategic shifts by transitioning away from low-margin project-based contracts in favor of lucrative public cloud deployments.
This pivot masked the substantial progress in the cloud segment’s revenue, yielding significantly higher profits. Notably, in Q2, cloud revenue surged by 6% to $3.7 billion, while adjusted earnings skyrocketed by 155% to $322 million.
Alibaba unveiled its proprietary large language models (LLMs), appealing to clients seeking AI development support. The company reported a triple-digit increase in AI-related revenue in the last quarter.
Not one to rest on its laurels, Alibaba unveiled over 100 new open-source AI models last Thursday. These models, based on the latest Qwen 2.5 LLM iteration, span various domains including language, audio, vision, coding, and mathematics. Additionally, Alibaba introduced a new text-to-video model from its Wanxiang LLM series, allowing users to create videos simply by typing prompts in Chinese or English. The enhanced vision language model supports video-based Q&A, expanding comprehension to videos exceeding 20 minutes.
Alibaba also highlighted comprehensive enhancements to its AI infrastructure services encompassing data center architecture, data management, model training, and reasoning. The company emphasized its unprecedented investment intensity, underscoring its commitment to global clientele.
Image source: Getty Images.
The Investment Perspective on Alibaba Stock
Alibaba faces constrained access to cutting-edge hardware compared to its U.S. counterparts, potentially hindering its global AI competition with industry giants like Amazon Web Services and Microsoft Azure. Moreover, Western firms may exhibit hesitancy in leveraging a Chinese AI partner.
Nonetheless, as the world’s second-largest economy, China offers ample growth prospects for Alibaba regionally and across Asia. A significant number of U.S. and other Western enterprises, including Ford Motor Company, rely on Alibaba’s cloud services.
Alibaba’s AI and cloud computing ventures possess promising growth trajectories. Encouragingly, its core e-commerce pillars exhibited signs of stability with surging orders and gross merchandise value in Q2. Planned monetization strategies following GMV growth signify impending revenue and profit upticks.
From a valuation lens, Alibaba’s stock offers a bargain, with a forward P/E ratio of approximately 10 in 2024 and an enterprise value-to-EBITDA multiple of 7. Considering Alibaba’s advances in e-commerce and the burgeoning potential in AI and cloud computing, seizing this juncture may present a golden opportunity for savvy investors.
BABA PE Ratio (Forward) data by YCharts
Considerations for Potential Investors in Alibaba Group
Before diving into Alibaba stock, contemplate this:
The Motley Fool Stock Advisor recently spotlighted the 10 best stocks primed for high returns, with Alibaba omitted from the roster. These identified stocks hold the potential for substantial future gains.
Reflect on Nvidia’s inclusion on this list in April 2005… a $1,000 investment then could have yielded a staggering $710,860*
The Stock Advisor furnishes investors with a roadmap to success, offering portfolio building guidance, analyst updates, and two monthly stock picks. Since 2002, Stock Advisor has outperformed the S&P 500 by over fourfold*.
Explore the 10 stocks today »
*Stock Advisor returns as of September 23, 2024
John Mackey, the former CEO of Whole Foods Market, sits on The Motley Fool’s board, and Geoffrey Seiler holds positions in Alibaba Group. The Motley Fool boasts positions in and recommends Amazon and Microsoft. The Motley Fool endorses Alibaba Group and suggests options on Microsoft. The Motley Fool adheres to a strict disclosure policy.
This article represents the author’s views and not necessarily those of Nasdaq, Inc.
