The past three years have been fantastic for growth stocks. Names like Nvidia, Palantir Technologies, and Arista Networks haven't just led the way. They've blazed a trail, logging enormous triple-digit gains fueled by the rise of artificial intelligence (AI).
This extreme bullishness, however, now presents a problem to investors. Not only are these companies' stories fully priced into their stocks, but these popular picks have also become uncomfortably expensive, crowded trades.
Not every growth stock, though. If you're willing to look a bit off the beaten path, you'll still find opportunity. And one of the best of these overlooked prospects at this time is Alibaba Group (BABA 4.04%).
Image source: Getty Images.
Alibaba under the microscope
There's the Alibaba you know. That's the parent to China's e-commerce sites Tmall and Taobao, which collectively account for about 40% of the nation's online shopping, as well as 40% of Alibaba's total revenue.
Its international e-commerce business makes up another 13% of companywide sales, growing 29% year over year last fiscal year to outpace its domestic e-commerce growth of 3%. Not bad, especially considering that the growth of its domestic online sales finally accelerated later in the year, thanks to rekindled strength in China's consumerism.
Then there's the Alibaba you (probably) don't know. That's digital entertainment platform Youku, a logistics arm called Cainiao, and a handful of other businesses.
The most exciting and most bullish among these others, however, is Alibaba's cloud computing arm. It's not a big business, at least not yet; cloud drives on the order of only 13% of the company's total top line. It is Alibaba's fastest-growing business, though, improving its sales to the tune of 11% in fiscal 2024, thanks to a quickening pace later in the year.
And for good reason. See, it's Alibaba's cloud computing arm that developed the conversational artificial intelligence platform called Qwen. Not only is this tech just as capable as familiar options, such as ChatGPT, Microsoft's Copilot, and Alphabet's Google Gemini, but Alibaba arguably has a competitive advantage as well. That is, Qwen's underlying software is open-source, meaning other developers can see its coding and optimize their use of it.
This should, in theory, encourage its usage even more. In this vein, as of the end of April, Qwen had been downloaded more than 300 million times. Even without knowing exactly how all these downloads will be monetized, this wide reach will funnel developers and consumers toward Alibaba's AI ecosystem.
All told, the analyst community is calling for companywide sales growth of just over 8% every year for at least the next three years. That's not huge, but it's respectably solid and will be paired with slightly stronger earnings growth that's likely to persist well beyond 2027.
It's undervalued because it's underestimated
The curious part to all of this is that none of it seems to be reflected in the company's stock price.
Sure, Alibaba shares are up from their 2024 low. Unlike most of the best-known U.S. growth stocks, though, this one remains under its February high and is still more than 60% below its 2020 pandemic-prompted peak.
Much of that weakness can be chalked up to 2020's regulatory crackdowns on several of China's higher-profile technology companies, including Alibaba. It was unclear then how difficult Beijing's scrutiny might become or how long it would last, keeping plenty of would-be buyers cautiously on the sidelines.
It would also be short-sighted to ignore that this company was agonizingly indecisive for much of the past couple of years. Early last year, for example, it cancelled plans to spin off its logistics arm just a few months after it called off the spinoff of its cloud computing business that had only just begun to develop Qwen in earnest. A big corporate reconfiguration and management shakeup in between those two decision reversals further chipped away at investor confidence.
Now, take a step back and look at the bigger picture. It's been a while since Alibaba's dished out any real drama.
Sure, the tariff war between China and the United States is supposed to be taking a toll on China's economy. If it is, though, somebody forgot to tell China and its consumers. The nation's retail spending was up 4.8% (year over year) in June following May's 6.4% growth. The first estimate of China's second-quarter gross domestic product (GDP) growth was also up a healthy 5.2%, topping expectations.
And yet, there are still talks of injecting stimulus into the country's economy. Not that it actually needs it, but if it gets that stimulus, there's every reason to believe Alibaba will be a significant and immediate beneficiary.
The kicker: This stock's trailing price-to-earnings (P/E) ratio is in the ballpark of 16 at this time. For comparison, the S&P 500's P/E currently stands at just under 25.
It's all about balancing risk and reward
To be clear, Alibaba isn't the company with the highest growth expectations right now. There are lots of companies capable of producing (and likely to) stronger growth for a long while. Shares of those other companies are steeply valued, however, if not outright priced for perfection. This limits their upside and even makes them vulnerable to sizable sell-offs.
That's not the case with Alibaba stock. While it may be a slower-growing growth name, it's also the ultimate growth stock to buy right now because it brings considerably less risk to the table than more familiar growth names do and, arguably, more upside. The consensus price target near $150 is 25% above the stock's present price, which is more implied upside than the aforementioned Palantir, Nvidia, and Arista Networks offer at this time. In fact, Palantir and Arista are both currently trading above their consensus targets.
Bottom line? Your chief job as an investor is to balance risk and reward in a way that makes the most sense for you. Alibaba's got less of the former and more of the latter than most of the other growth names that may be on your radar at this time. Just don't tarry if you agree. Alibaba shares are starting to climb, suggesting more investors are buying into the bullishness.
