There's an argument to be made that many artificial intelligence (AI) stocks are bargains right now, as long as things break in their favor in the coming years. I took a more conventional path to finding a bargain in this space, even though the name I settled on isn't very conventional.
The market doesn't see Alibaba (BABA 1.60%) as an AI stock. It's an e-commerce behemoth in China. It's the company that helped create a shopping holiday by promoting Nov. 11 as Singles Day, six years before Amazon fabricated its own Prime Day event.
You just have to keep digging. Break through the surface of Alibaba's two-headed e-commerce beast of its Taobao and Tmall subsidiaries. Travel the world to get beyond its growing AliExpress business, selling unbelievably inexpensive merchandise internationally. Then you'll see Alibaba hard at work on its AI future.
Image source: Getty Images
You can't spell Alibaba without AI
Alibaba is making big bets on AI. I'll get into why it can afford these outsize wagers shortly. For now, it's enough to say that Alibaba is all in on AI. Its cloud intelligence business, one of Alibaba's few profitable businesses outside e-commerce, is a rock star. The business saw its revenue climb 34% in Alibaba's latest quarter, more than double the 15% top-line growth from the continuing operations of the overall business.
A key spark in that cloud-hosting business is how demand for AI is fueling the boom. AI-related product revenue has rattled off nine consecutive quarters of triple-digit year-over-year growth. It's starting to move the needle and, in the process, reshaping the stock's narrative.
NYSE: BABA
Key Data Points
You don't need to panhandle when you own the bank
Let's get back to Alibaba's Singles Day. It's celebrated on Nov. 11, because if you spell the date out numerically, it's all ones -- singles. It's neat and in order. The same can be said about its flagship e-commerce businesses.
Taobao and Tmall combined to deliver 45% of Alibaba's consolidated revenue in fiscal 2025, but more than 100% of its consolidated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Many companies making significant investments in AI are taking on debt and issuing dilutive stock offerings in the secondary market. Alibaba doesn't have to give away the store to keep its lab running.
Taobao and Tmall teamed up to generate an adjusted EBITDA margin of 44% in fiscal 2025. This money has been returned to its shareholders through dividends and 14 consecutive quarters of stock buybacks. However, even that isn't enough to deploy all the cash that its e-commerce and now cloud-hosting business are generating. Alibaba is that rare company that can spend heavily -- to the tune of more than $17 billion in capital expenditures on AI and cloud infrastructure over the trailing 12 months -- and still deliver strong profitability.
So when China asked its hometown heroes to give it a hand in the trade war with the U.S. by helping with the production of AI chips as an alternative to Nvidia's (NVDA 1.55%) superior but tariff-saddled solution, Alibaba knew what it had to do. It can afford to step up with practically a blank check in its arsenal to invest in the ultimate AI growth market.
I promised you a cheap AI stock
I meant what I said when I argued that even the largest of AI stocks can be cheap in the right light. Nvidia is trading for just 25 times forward earnings. You probably thought it was going to be higher, but that just shows how stellar growth can catch up to a market-beating investment.
Alibaba isn't a shrinking violet. The stock is up 75% in 2025, heading into the final trading day of the year. You probably think this self-financing AI dream factory is trading at a juicy earnings multiple, but it's trading for less than 16 times next fiscal year's profit target.
AI stock? Check. Bargain? Check. Hungry for more gains in 2026? Check, please.
