Many companies involved with artificial intelligence (AI) have been experiencing tremendous growth in recent years. And while it has been slowing down for a lot of the big names, there are still companies that remain in the early innings of that increase, and they may enjoy some considerable upside down the road.
One stock that is a potentially big player in AI is China-based tech company Alibaba Group (BABA 0.37%). It's known for its e-commerce business but has been expanding and diversifying. AI is one of its most exciting opportunities, and that part of its business has been taking off.
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Alibaba's AI revenue has risen by triple digits for a ninth straight period
Last month, Alibaba reported its latest earnings numbers for the period ended Sept. 30. Its top line may look uninspiring, with revenue rising by just 5% to $34.8 billion. That doesn't seem very impressive for a business that's doing well with AI.
But if you strip out recently disposed businesses, then its growth rate climbs to 15%. And the company says its AI-related product revenue grew by triple digits for a ninth consecutive period.
NYSE: BABA
Key Data Points
The business is so huge that it can achieve this type of AI-powered growth while still not experiencing a drastic increase in its top line -- yet. The company doesn't break out AI as a separate segment on its financials, but both its cloud intelligence and e-commerce business units could benefit from investments in AI. Its cloud intelligence business was one of its fastest-growing segments, with 34% growth last quarter.
An encouraging trend for an underrated stock
Shares of Alibaba are up around 87% for the year (as of Nov 28). The tech stock has emerged on the radar of many growth investors as its numbers have been looking better and it has been involved in many opportunities related to AI. For example, it has been working on its own chip and has partnered with Apple on making AI tools for iPhones.
Meanwhile, the stock trades at a price-to-earnings multiple of just 21, which looks attractive when compared to the Technology Select Sector SPDR, where the average stock is valued at 41 times earnings. Investors have been willing to pay significant premiums like that for tech stocks involved with AI.
And while Alibaba has been rallying this year, it hasn't always been a hot buy with investors due to concerns about potential interference from the Chinese government. Thus, its valuation remains relatively low in the AI world.
Is Alibaba stock a good buy today?
Even though Alibaba has been doing well this year, it's still down 40% over the past five years, which signifies just how much hesitancy there has been around this business in recent years, in large part due to geography and its exposure to the Chinese government. Those fears haven't lived up to reality, however, as the company has continued to be a big name in e-commerce and is now developing its AI business.
There's inevitably going to be some risk with the stock due to the potential for government involvement, but I believe it's one of the better AI stocks to buy right now. The Chinese market is huge, and with Alibaba being one of the big players in tech, it may continue to benefit from AI trends for the foreseeable future. It can also be a great way for investors to diversify outside of the top tech stocks in the U.S.
At a reasonable valuation, Alibaba's stock can be a strong long-term buy right now.
