We came across a bullish thesis on Alibaba Group Holding Limited (BABA) on Substack by Kontra Investments. In this article, we will summarize the bulls’ thesis on BABA. Alibaba Group Holding Limited (BABA)’s share was trading at $135.14 as of March 21st. BABA’s trailing and forward P/E were 19.61 and 13.37 respectively according to Yahoo Finance.
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Alibaba delivered a strong financial performance in its latest quarter, exceeding market expectations with 8% year-over-year revenue growth and a 4% rise in adjusted EBITA. This growth was fueled primarily by the renewed strength in its Taobao Tmall Group (TTG) and Cloud Intelligence segments. TTG remains Alibaba’s core revenue driver, with customer management revenue growing 9.4% year-over-year, reflecting increased merchant ad spending and improved monetization. Despite subdued consumer spending trends in China, TTG’s revenue growth is expected to sustain at 7-8% annually. The segment’s adjusted EBITA has stabilized, returning to modest growth of 2-4% year-over-year, underscoring Alibaba’s effective cost management and reinvestment discipline.
Alibaba’s cloud business continues to gain momentum, growing 13% year-over-year, with AI-related revenue surging at a triple-digit pace for the sixth consecutive quarter. This strength follows the launch of advanced AI models like DeepSeek and Qwen, which are driving demand across industries. To support this expansion, Alibaba has committed approximately RMB 380 billion (~$52 billion) in capital expenditures over the next three years, a significant investment though still conservative compared to U.S. tech giants like Microsoft and Amazon. While Alibaba’s AI business is growing rapidly, its annualized AI revenue, nearing $1 billion, remains a fraction of Microsoft’s $13 billion Azure AI segment.
The AI market in China is fiercely competitive, with Alibaba facing aggressive pricing pressure from Tencent, ByteDance, and Baidu. Price reductions of up to 97% have made AI services extremely affordable, enhancing market penetration but limiting near-term revenue contribution. For instance, Alibaba’s Qwen Turbo is priced significantly lower than OpenAI’s GPT series, helping with adoption but restraining profitability. Despite substantial AI engagement, the revenue impact remains modest compared to Western peers.
Alibaba’s overall profitability remains solid, with adjusted EBITA margins reaching 20%, driven by TTG’s robust profitability (45% EBITA margin) and strong Cloud Intelligence EBITA growth (+32.7% YoY). While planned AI and cloud infrastructure investments will increase depreciation costs, margins are expected to remain stable. Free cash flow generation remains strong, though higher capital expenditures may exert some near-term pressure. However, Alibaba’s balance sheet remains resilient, with manageable leverage and minimal financial distress risk.
The company trades at a historically low valuation relative to global peers, with a forward P/E of 13.5x for 2025, well below its five-year average of 20x. Its EV/EBITDA of 7.5x and price-to-sales ratio of 2.5x suggest significant upside potential. Risks include intensifying competition from platforms like Pinduoduo and Douyin, regulatory scrutiny, AI monetization challenges, and macroeconomic uncertainties in China. Despite these risks, Alibaba’s dominant e-commerce position, cloud expansion, and AI strategy position it for long-term growth. Reliable cash flow from e-commerce, combined with AI-driven upside, supports Alibaba’s continued value accretion.
Alibaba Group Holding Limited (BABA) is on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 107 hedge fund portfolios held BABA at the end of the fourth quarter which was 115 in the previous quarter. While we acknowledge the risk and potential of BABA as an investment, our conviction lies in the belief that some 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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Disclosure: None. This article was originally published at Insider Monkey.