4. Alibaba Group Holding Limited (NYSE:BABA)
Forward P/E Ratio: 9.95
Earnings Growth This Year: 3.70%
Number of Hedge Fund Holders: 91
One of the first names that comes to mind while talking about Chinese technology is Alibaba Group Holding Limited (NYSE:BABA). However, the company has been facing some difficulty maintaining its market-leading position. But it is still amongst the leaders when it comes to e-commerce, cloud technologies, and now AI as well.
The concept of artificial intelligence is not new for the tech giant. It has been using 24/7 chatbots long before artificial intelligence became a buzzword. However, management has made some recent developments within its cloud business which is driving improved revenues.
In the fiscal first quarter of 2025, Alibaba Group Holding Limited (NYSE:BABA) reported that its revenue grew 6% on the back of double-digit growth in its cloud business. Its AI-related product revenues were impressive with 155% growth during the same time.
The cloud segment growth was also due to an artificial integration that provides personalized suggestions for customers, resulting in targeted marketing of its products. It is also developing its large language model called Qwen 2.0, which will support more than 27 languages. Users have been liking Alibaba Group Holding Limited’s (NYSE:BABA) AI cloud platform indicated by a robust 200% growth during the quarter.
Management and analysts believed that artificial intelligence has the potential to bring the company to its former glory and it seems Alibaba Group Holding Limited (NYSE:BABA) has been doing well in keeping up the expectation.
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)
