It's been a roller-coaster ride for investors in Alibaba Group (BABA +0.45%). Luckily, the last section of the ride has been positive, with the company's stock up over 100% in the past 12 months (as of Jan. 13). That was a much-needed performance for a stock that hasn't performed well in recent years. Its stock is still down over 31% in the past five years.
While everything hasn't been peachy keen with Alibaba in recent years, there are glimmers of hope going forward. If you're considering investing in Alibaba, here are three reasons to do so.
Image source: Alibaba.
1. Alibaba's cloud business is picking up steam
Alibaba is known for its e-commerce business, holding a 41% market share in e-commerce in China. However, its cloud platform, Alibaba Cloud, has grown impressively recently as artificial intelligence (AI) developments have resulted in much higher demand.
In the latest quarter, Alibaba's Cloud Intelligence Group (CIG) segment grew 34% year over year, outpacing total revenue, e-commerce revenue, and its other business segments. Its AI-related product revenue grew by triple digits, helping to bring its total revenue to $34.8 billion, up 15% excluding its disposed Sun Art and Intime businesses.
A key advantage for Alibaba has been its AI model, Qwen. Unlike models like OpenAI's GPTs, Qwen is an open-source model that lets developers work on it and integrate it into their own apps. Alibaba recently announced that the models surpassed 700 million downloads on Hugging Face, a platform where developers share models. This are more downloads than the next eight models combined.
Last year, Alibaba announced it would invest around $53 billion in AI infrastructure over the next two to three years, with most of it presumably going toward expanding its data centers and strengthening the appeal of Alibaba Cloud.
NYSE: BABA
Key Data Points
2. Chinese regulations are easing
It's hard to talk about Alibaba's business without mentioning the impact Chinese regulations have had on it. Beginning around 2020, China began a crackdown on its tech sector that had a large impact on Alibaba's business. It came with intense antitrust scrutiny (and a roughly $2.8 billion fine), changed how many platforms operated, and slowed growth.
Now, the Chinese government seems to be shifting its tone with its 15th five-year plan (2026 to 2030). In the plan, which is expected to be reviewed and approved in March, China has placed an emphasis on digitizing and transforming industries like logistics, manufacturing, healthcare, energy, education, and more.
This is great news for Alibaba because its key businesses -- e-commerce, cloud computing, and AI -- are exactly what the government is trying to build on to modernize its economy and boost productivity. By no means will Alibaba be able to operate freely or without oversight, but the government will become more like a "strategic partner" and treat Alibaba and other tech companies as essential for China's advancement.
3. Alibaba is trading at a good value for long-term investors
Alibaba's valuation has surged over the past 12 months, going from trading at around 11.6 times its earnings 12 months ago to now trading close to 23 times its earnings. Although I wouldn't consider it undervalued, it's an attractive entry point for long-term investors. Not only is it cheaper than its average over the past five years (27.6), but it's also cheaper than American tech companies like Amazon, Microsoft, and Alphabet that also have a lot of cloud exposure and similar overlap in certain industries.
AMZN PE Ratio data by YCharts
That's not to say that Alibaba deserves to be valued like those companies because there are more external risks to Alibaba, but you're getting a premier tech company for relatively cheap. There will inevitably be volatility along the way, but the trajectory seems to be up for the company.
