We recently compiled a list of the 16 Most Undervalued Tech Stocks To Buy Now. In this article, we are going to take a look at where Alibaba Group Holding Limited (NYSE:BABA) stands against the other undervalued tech stocks.
Artificial Intelligence and Data Centers
Artificial intelligence is the hot center of the technology industry, especially with the introduction of Large Language Models (LLMs) like ChatGPT and Gemini. The AI revolution, which is underway, has affected the semiconductor market and we have seen chipmaker stocks skyrocket with it. However, semiconductor stocks are not the only beneficiaries, data centers also benefit greatly from the surge in AI.
According to Future Market Intelligence, the data center market is estimated at around $30.4 billion during 2024, it is expected to grow at a compound annual growth rate of 14.4% to reach $117.24 billion by 2034. Data centers were in demand before the AI boom as well, with data from Jefferies showing their demand rising 10% to 20% for the last 15 years before AI. However, AI accelerated the market to around 30% in just two years.
The capabilities of data centers and artificial intelligence are revolutionary, but that doesn’t overshadow the energy consumption concerns that come with them. As highlighted by Goldman Sachs Research, data centers consume around 1% to 2% of overall power worldwide, which seems manageable at first. However, they are likely to rise from 3% to 4% in just a decade.
We recently covered 15 Best Data Center Stocks To Buy According to Jefferies, Citi and Wall Street Analysts. It talks about the alarming power consumption challenge that comes with AI and data centers. Here’s an excerpt from the article:
“Naturally, since the US is responsible for ushering in AI, AI energy consumption in America is higher than that in other countries. According to the Boston Consulting Group, by 2030, AI power consumption will account for 16% of all of America’s energy use. It is expected to grow by 15% to 20% annually and touch as much as 130 GW, or the amount of electricity that’s used by 100 million homes. AI chip companies are also aware of these trends, with the latest AI chips promising to improve energy efficiency by 25x. Improving AI performance at the semiconductor level is important especially since some areas where data centers are growing are being forced to turn to coal power to reduce the power gap.”
While the expected power consumption figures are concerning, they also point towards a new market opportunity to introduce “sustainable AI factories”. Tim Rosenfield co-founder and co-CEO of Sustainable Metal Cloud, has introduced HyperCubes, which reduces energy consumption by up to 50%.
HyperCubes contains servers fitted with Nvidia processors, submerged in synthetic oil called polyalphaolefin. Synthetic oil draws heat from the processors more efficiently than air cooling systems typically used in most data centers.
These cubes are being used in Singapore and Australia. Tim Rosenfield mentioned that the technology enables high-density hosting for GPUs and that too sustainably with low energy consumption. The technology is also said to be 28% cheaper to install as compared to traditional cooling systems and is designed to be used in any data center around the globe.
The co-founder of SMC further mentioned that countries like Singapore are looking to push the “green” button for data centers and AI ambitions and the country has committed more than $379.7 million to the cause.
Countries like Singapore, where SMC is headquartered, are also looking to mitigate the hefty energy consumption by pushing for “green” data centers to support its AI ambitions where the country has committed more than 500 million Singapore dollars ($379.7 million). The company has also recently received funding from Singapore state investor Temasek-backed ST Telemedia Global Data Centers, one of Asia’s largest data center operators.
Our Methodology
To curate the list of 16 most undervalued tech stocks to buy now we first identified 50 undervalued tech stocks that were most widely held by hedge funds. We looked at stocks that were trading under 20 times their forward earnings (the market’s P/E multiple is ~23x as of August 28, according to WSJ data), with earnings expected to grow during the year. Once we had an aggregated list of 50 undervalued tech stocks, we ranked them by short percentage of shares outstanding as of 8/15/2024, sourced from Yahoo Finance.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An e-commerce platform displaying a wide range of products to customers online.
Alibaba Group Holding Limited (NYSE:BABA)
Short % of Shares Outstanding: 2.37%
Number of Hedge Fund Holders: 91
Forward Price to Earnings Ratio as of August 28: 9.21
Alibaba Group Holding Limited (NYSE:BABA) is a leader when it comes to the Chinese technology sector. It provides technology infrastructure and marketing reach to merchants through its e-commerce platform. Moreover, the company also provides cloud services and other technology solutions to its customers.
As of late, the Chinese tech giant has been facing some difficulties due to its huge market capitalization of $187.88 billion and increasing competition in the market. However, management knows how to regain the former glory. Alibaba Group Holding Limited (NYSE:BABA) has been betting heavily on Artificial Intelligence across all its business segments be it e-commerce or cloud computing services.
It has already been using AI features with its 24/7 chatbot services, recently management introduced AI to provide personalized recommendations to drive better sales through targeted marketing. Its cloud business is also witnessing improvement thanks to AI-driven products.
During the Fiscal Q1 2025, the overall revenue of the company grew 6% year-over-year, driven by double-digit growth in its cloud business. Most notably, its AI-related product revenue grew by triple digits, 155%. Management has shown its continued interest in investing in AI infrastructure and believes it can increase its cloud adoption and help maintain its market leadership.
In addition, Alibaba Group Holding Limited (NYSE:BABA) is also developing its Qwen 2.0 series of large language models through open-source development. Management believes that open-source development has significantly improved the model and has enhanced its safety features and ability to support more than 27 languages. The number of users using the company’s cloud AI platform has increased by 200% during the quarter, indicating continued growth.
BABA is cheap at current levels, it is trading at only 9 times its forward earnings, a 42% discount to its sector. Moreover, its earnings are also expected to rise by 2.70% during the year to reach $8.81.
It was held by 91 hedge funds in Q2 2024, with total stakes worth $3.81 billion. Appaloosa Management LP is the top share holder of the company with a position worth $756 million.
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)
Overall BABA ranks 16th on our list of the most undervalued tech stocks to buy now. While we acknowledge the potential of BABA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock 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 is originally published at Insider Monkey.
