We recently published a list of 10 Buzzing AI Stocks on Latest News and Analyst Ratings. Since Alibaba Group Holding Ltd – ADR (NYSE:BABA) ranks 5th on the list, it deserves a deeper look.
Investors are still digesting the Fed’s aggressive rate cut and charting the path forward. Roger Altman, Evercore founder and senior chairman, said while talking to CNBC in a latest program that the Fed was not “behind the curve” but it went with a higher-than-expected rate cut amid labor market concerns.
Asked if he thinks we are headed toward a soft landing scenario, Altman said yes, as he believes growth is “resilient” and corporate profit outlook is good. Altman said equity markets are headed to have their best year since 1960.
“If the landing is finished and the Fed hits its target, Powell will deserve an A and it would be a pretty miraculous achievement,” Altman said.
While the analyst believes currently it’s a “near perfect” overall environment for the market, he did point to “storm clouds” gathering over the international stage including the expanding crisis in the Middle East, Russia’s war on Ukraine and America’s overall fiscal situation.
For this article we chose 10 trending AI stocks based on latest news and analyst ratings. With each company we have mentioned its hedge fund sentiment. Why are we interested in the stocks that hedge funds pile into? 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).
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Alibaba Group Holding Ltd – ADR (NYSE:BABA)
Number of Hedge Fund Investors: 91
Alibaba Group Holding Ltd – ADR (NYSE:BABA) is trying hard to catch up with peers in the AI race. The Chinese ecommerce and Cloud giant recently made headlines after reports that the company released 100 open-source artificial intelligence models. The company also released a text-to-video tool based on its AI models. Alibaba Group Holding Ltd – ADR (NYSE:BABA) open-source models are developed to be used in various industries including automobiles, gaming and science research.
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.
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, Alibaba Group Holding Ltd – ADR (NYSE:BABA) ranks 5th on Insider Monkey’s list titled 10 Buzzing AI Stocks on Latest News and Analyst Ratings. While we acknowledge the potential of Alibaba Group Holding Ltd – ADR (NYSE:BABA), 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 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 is originally published at Insider Monkey.
