The last 12 months have been a great time to own artificial intelligence-related stocks as leading companies like Nvidia (NVDA +4.39%) and Palantir reached multiple new highs.
Still, the euphoria in AI-related stocks remained mainly with large U.S. tech companies, leaving behind its Chinese peers.
Yet, the rise of DeepSeek of late has completely shocked the investment world, suggesting that ignoring Chinese tech companies is no longer possible.
Image source: Getty Images.
What is DeepSeek all about, and why does it matter?
A Chinese AI company developing large language models (LLM), DeepSeek has gained attention lately as it claims that its advanced AI model rivals that of OpenAI's GPT-4.
DeepSeek's announcement marks a significant milestone for the Chinese tech industry, suggesting Chinese companies can build world-class AI models. Besides, the AI company claims it used less-powerful chips to achieve the outcome, as the most advanced chips remain out of reach due to trade restrictions. And above all, it claims to have done so at a fraction of the cost of its Western peers.
DeepSeek's success, while massive on a company level, suggests there could be more to the Chinese AI industry. As investors reconsider investing in the Chinese tech landscape, Alibaba (BABA 3.24%) could emerge as a massive winner.
Alibaba is a well-established and profitable tech company
The growth of the AI industry captures investors' attention due to its vast value creation opportunity. According to Statista, the AI market could reach $827 billion by 2030.
Yet, most investors do not pay as much attention to the enormous capital investment needed to win this race. Heavy investments required to build data centers, train AI models, and ongoing research and development costs mean companies must have deep pockets to invest billions of dollars annually for years before seeing the fruits of their labors. For instance, Meta Platforms announced it would invest $60 billion to $65 billion in capex in 2025 to power its AI ambition.
Fortunately, Alibaba has the financial resources needed to invest heavily in the long run. It's the largest e-commerce platform in China, making tens of billions of dollars in profits each year. In the fiscal year 2024, which ended March 31, 2024, Alibaba generated $22 billion in free cash flow. It also had $62 billion in net cash position (after excluding its borrowings).
Besides its deep pockets, Alibaba has access to the best talent and technology in China -- the latter due to its ownership of Alibaba Cloud -- giving it all the resources needed to invest heavily in the AI industry.
NYSE: BABA
Key Data Points
Alibaba is strategically positioned to benefit from the rise of AI
Central to Alibaba's AI long-term strategic positioning is its cloud computing business.
As the most significant cloud player with a 39% market share, Alibaba Cloud has the most extensive, lowest-cost cloud infrastructure in China, which is essential to developing and running leading-edge AI technologies like machine learning and generative AI. Its cloud industry leadership position also provides a vast customer base to experiment with and innovate new AI technologies. Comparatively, AI start-ups will have difficulties convincing established companies when developing their AI models.
Another advantage for Alibaba is its extensive business ecosystem, providing plenty of use cases and data to train and improve its AI models. For instance, the tech giant applied AI technologies to its e-commerce business in customer service, logistics, and product recommendation. This AI-first approach is consistent with the new CEO's plan to leverage AI to build the next-generation shopping app for Chinese consumers. Plus, the tech company can leverage its ecosystem to test-drive its in-house developed LLM, Tongyi Qianen (Qwen).
Moreover, Alibaba's diversified business model provides it ample opportunity to monetize AI technologies, be it in cloud computing AI services, AI in e-commerce, or fintech (Ant Group). So, Alibaba has multiple ways to win in this AI race.
Alibaba offers investors a safer ride on the AI trend
AI is a massive trend that no investor can ignore, as it will impact every industry and company.
Still, finding a worthy AI company that's not risky to bet on isn't easy. Well-established names like Palantir and Nvidia have lofty valuations, while smaller ones like C3.ai are unprofitable.
Alibaba is a rare gem: already profitable yet has enormous potential to gain from the AI trend. Better still, it has an undemanding valuation. For perspective, it has a price-to-sales value of 1.9 times, a massive discount to Palantir's PS ratio of 94.4 times.
Owning Alibaba's stock will help investors sleep better, knowing they are positioned to benefit from the rise of AI without taking unnecessary speculative risks.
