Key Points
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Alibaba’s growth may not look that impressive, but that’s because AI may still not make up a big chunk of its business.
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Despite the stock’s significant gains over this year, its valuation still looks modest in relation to the red-hot tech sector.
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Many companies involved in artificial intelligence (AI) have been experiencing tremendous growth in recent years. Despite a recent slowdown for many big names, several companies are still in the early stages of significant development and may see considerable upside in the future. One such company with potential in AI is the China-based tech giant, Alibaba Group ((NYSE: BABA)).
Known primarily for its e-commerce business, Alibaba has been diversifying and expanding its portfolio. AI is one of the most exciting avenues for growth, and that segment is beginning to gain traction.
Alibaba’s AI revenue has risen by triple digits for a ninth straight period
Last month, Alibaba released its latest earnings report for the quarter ending September 30. While its top line revenue may seem unremarkable, with only a 5% increase to $34.8 billion, there’s more below the surface. Excluding disposed businesses, the growth rate accelerates to 15%. Notably, Alibaba claims that its AI-related product revenue has grown by triple digits for nine consecutive periods.
This substantial AI-driven growth occurs despite a relatively static top line—at least for now. The company does not categorize AI as a separate segment in its financial disclosures, but investments in AI technology are likely enhancing both its cloud intelligence and e-commerce business units. Notably, its cloud intelligence business showed a remarkable 34% growth last quarter, highlighting the potential impact of AI integration.
An encouraging trend for an underrated stock
As of November 28, Alibaba shares have surged roughly 87% this year. The stock has captured the attention of many growth investors as its performance improves, particularly concerning its AI initiatives. For example, the company is working on its own chips and has even partnered with Apple to create AI tools for iPhones.
Currently, Alibaba’s stock trades at a price-to-earnings (P/E) ratio of just 21. This valuation appears favorable when compared to the broader tech sector, where the average stock trades at 41 times earnings. Investors have been willing to pay a premium for tech stocks involved with AI, making Alibaba’s valuation especially appealing.
Despite its remarkable rally this year, Alibaba has been viewed skeptically in the past, primarily due to concerns surrounding potential government interference in China. This hesitance has kept its valuation below that of its competitors in the AI space, creating an opportunity for discerning investors.
Is Alibaba stock a good buy today?
While Alibaba has made substantial gains this year, it remains about 40% down from its performance five years ago, reflecting the volatility and hesitation associated with the stock. Concerns over Chinese governmental policies have loomed large, yet the company has sustained its status as a major player in e-commerce while developing its AI capabilities.
There is an inherent risk involved with the stock, given the potential for governmental concern; however, it stands as one of the more promising AI stocks that investors might consider. The Chinese market is vast, and Alibaba’s position as a significant tech player may provide substantial benefits as AI trends continue to evolve. Furthermore, investing in Alibaba could serve as an opportunity for diversification outside the bustling U.S. tech scene.
With its appealing valuation, Alibaba’s stock represents a compelling long-term opportunity for investors looking to capitalize on burgeoning AI trends.
Should you invest $1,000 in Alibaba Group right now?
Before making an investment decision in Alibaba Group, it’s crucial to weigh the recommendations of industry experts. The Motley Fool Stock Advisor analyst team has identified their current 10 best stocks for today, and Alibaba Group doesn’t make the list. Historically, investments in stocks included in this list have produced monumental returns.
The Motley Fool has a track record for identifying winners; for instance, investing $1,000 in Netflix when it was recommended would have yielded about $589,717 today. Similarly, investing in Nvidia at the time of its recommendation would have turned into approximately $1,111,405!
For those looking to maximize their returns, staying updated on the Stock Advisor recommendations may prove beneficial.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
