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Why Alibaba Stock Rose Today

By Jeremy Bowman – Oct 19, 2021 at 4:04PM

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Good news on the microchip development front impressed investors.

What happened

Shares of Alibaba (BABA -2.73%) moved higher Tuesday after the company unveiled a new high-tech microchip to run its cloud servers. The semiconductor is one of China's most advanced and could help change the narrative around the stock, which has been battered due to Beijing's regulatory crackdown on China's tech sector giants.

The stock closed the trading session up by 6.2%.

A rock with the Alibaba logo at a company office.

Image source: Alibaba.

So what

Alibaba said the new chip is built using advanced 5-nanometer technology, and represents a significant step toward China's goal of manufacturing more of its own semiconductors. Alibaba will not sell the chips. Instead, it plans to use them to run its own servers for its fast-growing cloud-computing division. 

The announcement is an important step for Alibaba's own development as a cloud-computing leader, moving away from chip suppliers, and is a signal to Beijing that the company is more than just an e-commerce marketplace. The Chinese government has of late favored companies producing technology like semiconductors that can give the country a competitive advantage, while putting restrictions on technologies like online marketplaces that don't offer the same set of benefits and may be seen as impeding competition and hurting consumers. The move also gives Alibaba an advantage at a time when a global chip shortage is impacting the tech industry more broadly.

"We plan to use the custom-built chips to support current and future businesses across the Alibaba Group ecosystem," said Alibaba Cloud President Jeff Zhang. "We will also offer our clients next-generation computing services with the new chip-powered servers through Alibaba Cloud in the near future."

Now what

After declining over much of this year due in part to tightening tech regulations from Beijing, Alibaba shares seem to be finding new life. The stock has also been getting attention from Reddit's WallStreetBets forum, and investors are showing optimism in light of signs of a thaw in the U.S.-China trade conflict. Alibaba stock is up almost 20% so far this month.

There are still plenty of risks facing the tech company at this point, but the new chip, which will help Chinese companies that use Alibaba Cloud, is a reminder to Beijing that, in many ways, Alibaba's successes are China's successes, and that damaging the company in a lasting way would only make it harder for the government to achieve its economic goals.

Putting aside the regulatory concerns, the stock still looks cheap at a price-to-earnings ratio of 18, especially considering its growth rate and tech leadership.

Jeremy Bowman owns shares of Alibaba Group Holding Ltd. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd. The Motley Fool has a disclosure policy.

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