1. Alibaba Group Holding Ltd – ADR (NYSE: BABA)
Billionaire David Tepper’s Stake: $756,000,000
Alibaba Group Holding Ltd – ADR (NYSE:BABA) recently posted its quarterly results which were mixed as revenue missed Wall Street estimates. BofA Securities and Truist reaffirmed their Buy ratings on the stock after the results. Bernstein, on the other hand, gave it a Market-Perform rating while upping the price target from $80 to $85. Truist also kept its Buy rating but adjusted its price target down from $110 to $100, noting that Alibaba Group Holding Ltd – ADR (NYSE:BABA) fiscal Q1 2025 results showed solid operational performance despite a challenging macro environment.
UBS is bullish on Alibaba Group Holding Ltd’s (NYSE:BABA) exposure to AI because of Alibaba Cloud, or Alibaba Cloud, which makes the Chinese company a formidable player in the AI enabling layer. In the intelligence layer, UBS highlighted Alibaba Group Holding Ltd’s (NYSE:BABA) Qwen large language model, while the Qwen agent makes the company’s presence notable in the application layer.
However, uncertainties in China and Alibaba Group Holding Ltd’s (NYSE:BABA) lackluster performance have damaged the sentiment around the stock. While Alibaba Cloud is a significant player in the market, analysts believe enormous growth and advancements of Alphabet, Amazon and Microsoft in the public Cloud markets have left Alibaba Group Holding Ltd (NYSE:BABA) behind. Wall Street analysts expect Alibaba earnings to grow at a CAGR of just 1.7% only over the next five years. Alibaba Group Holding Ltd’s (NYSE:BABA) forward PEG ratio is 3.29, which is high when we incorporate the unimpressive earnings growth expectations.
Alibaba Group Holding Ltd’s (NYSE:BABA) e-commerce business is also struggling as buyers in China become price-conscious amid a broader slowdown. However, Alibaba Group Holding Ltd (NYSE:BABA) bulls believe the stock could rebound if the situation improves in the country, given the company’s massive cash flow position.
O’keefe Stevens Advisory stated the following regarding Alibaba Group Holding Limited (NYSE:BABA) in its Q2 2024 investor letter:
“We initiated two new positions during the quarter: Alibaba Group Holding Limited (NYSE:BABA) and Perrigo (PRGO). Both have seen their stocks decline over 70%+ from their all-time highs.
Alibaba is the largest e-commerce player in China, with 40% gross merchandise volume (GMV) market share through its Taobao and T-mall businesses. While the cloud computing business is relatively small, its 37% market share in China positions it well to capitalize on the increasing demand for AI-related products. In the most recent quarter, AI-related cloud revenue recorded triple-digit growth y/y, with the expectation that total cloud revenue will accelerate to double-digit growth in 2H 2025.
It’s rare to find a dominant market share business with significant tailwinds trading for ~10x adj. EPS. After accounting for their ~$60B net cash balance sheet, the stock is trading at 6-7x, which, we believe, is far too cheap. We understand this business would not trade at this price if it were a U.S. business. However, the valuation gap at a high single-digit P/E is pricing in a combination of the following risks – 1. China invading Taiwan. 2. Cash can never leave mainland China (disproven). 3. Increasing competition from Pinduoduo and Shien resulting in market share loss 4. China’s geopolitical tensions worsen. 5. Economic slowdown stemming from the recent housing market downturn. 6. VIE structure creates doubt over the actual ownership of the business. All risks have merit, with cash distribution restrictions at the lower end due to the recently announced dividend and special dividend. Cash returned to shareholders totaled $16.5B in FY24, up from $13.4B in FY23…” (Click here to read the full text)
While we acknowledge the potential of Alibaba Group Holding Limited (NYSE:BABA), our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BABA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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