Alibaba is Back But This is Still The Beginning

Alibaba Group Holding Limited (NYSE:BABA) found itself on the wrong side of government scrutiny in late 2020, which forced the company to delay the public listing of its financial services business, Ant Group. From a high of over $310 in October 2020, Alibaba stock declined to less than $64 in October 2022, wiping billions of investor money in the process. After making lackluster progress toward a meaningful recovery in both 2023 and 2024, Alibaba stock has gained more than 50% so far this year on the back of its co-founder Jack Ma’s meeting with Chinese President Xi Jinping last month, suggesting the political turmoil facing the tech giant is finally coming to an end. According to Bloomberg, during this meeting, President Xi pledged to support the private tech sector in the country by avoiding excessive fines on tech giants.

After staying behind the scenes in the last few years, Jack Ma has once again resurfaced publicly, this time with a clear focus on revitalizing Alibaba’s growth through strategic AI investments. Even on the back of recent gains, Alibaba is still reasonably valued at a forward P/E ratio of around 14, which leaves ample room for a multiple expansion in the long run when AI investments start yielding desired returns.

Investors, however, will have to keep a close eye on how Alibaba navigates the trade war between the U.S. and its trading partners. In addition to the 10% tariff on all Chinese imports implemented as part of Executive Order 14195 on Feb. 1 which was later increased to 20% – President Trump announced a new 34% tariff on Chinese imports on April 2, resulting in an effective tariff rate of 54%.

Alibaba has introduced a multifaceted AI strategy focusing on all of its key businesses. Some of the key AI focus areas are listed below.

1. Cloud AI upgrades to better position itself to compete with Baidu and Tencent.

2. AI in e-commerce personalized recommendations, customer service, and smarter logistics.

3. Generative AI launching an advanced Qwen model.

Last February, Alibaba announced a $53 billion investment in AI and cloud computing infrastructure over the next three years which is more than what the company has spent on AI in total in the past decade. These aggressive AI investments aim to improve the computing power of Alibaba Cloud to support advanced AI applications. As part of these investments, the company will also focus on upgrading its generative AI model, Qwen.

The introduction of the Qwen 2.5 series in late January has already tilted the odds in favor of Alibaba in China’s generative AI landscape due to the superior performance of this model. As illustrated below, Qwen 2.5 Max, the most advanced model, achieved better performance metrics than groundbreaking DeepSeek across several benchmark studies. Interestingly, Qwen 2.5 surpassed GPT-4o in certain studies as well, which suggests Alibaba is on track to becoming a global generative AI powerhouse.

Source: Qwenlm

With the latest upgrades to Qwen, the AI chatbot can now perform advanced tasks such as image analysis, audio processing, and image generation. Planned investments in the model should boost the market perception toward Alibaba in the future as the company is likely to emerge as the leading AI player in China.

In addition to this, Alibaba remains laser-focused on boosting the efficiency of its partner merchants through the integration of AI technology. The company aims for 100% of AI adoption among merchants by the end of this year. The company’s merchant-focused AI tools, nestled under Aidge AI Toolkit, can help sellers with marketing, inventory management, handling customer queries, and even implementing risk control measures. For customers, the company is rolling out interesting features powered by AI such as virtual try-ons for clothing.

In the long run, Alibaba’s multifaceted AI strategy is likely to open new doors to grow through higher customer stickiness, improved merchant satisfaction, and new monetization opportunities. In addition, the company will see improved operating margins when AI investments start delivering expected results.

The tariffs imposed by President Donald Trump on Chinese imports will hurt Alibaba, especially AliExpress which ships small orders to U.S. customers. As per the updated tax policy, China will no longer benefit from the De Minimis Exemption which allowed Chinese companies to enjoy an exemption from import duties for shipments valued under $800. The rise of Chinese shopping applications in the U.S., including AliExpress, Temu, and Shein, was possible because of this import duty exemption. The U.S. has historically accounted for around 20% of the gross merchandise value reported by AliExpress, which highlights the importance of the U.S. market for Alibaba’s international commerce business.

Alibaba has been proactively targeting U.S.-based sellers to mitigate the impact of new tax policy changes. On April 3, the company held a seller summit in Los Angeles to woe new merchants. AliExpress is also running a campaign to offer zero merchant fees for a limited time for U.S. sellers who register within this month. These strategies will help the company build a more localized business centered on U.S. sellers, which seems like the right strategy given the expected tariff impact on Chinese imports.

Alibaba’s strong focus on the e-commerce market in China, on the other hand, will make it easier for the company to survive the trade war. Although the U.S. is an important market for AliExpress, at the company level, international commerce accounts for less than 20% of revenue. The high concentration on the domestic market will be a saving grace for the company in the next few years as a de-escalation of the trade war between the U.S. and China seems unlikely in the foreseeable future.

Alibaba e-commerce revenue by region

Source: Statista

Alibaba’s expansion into other high-growth international markets is another strategy that is likely to help the company survive the trade war. AliExpress has already expanded into many European markets and the company is aggressively targeting the fast-growing Middle Eastern market via Trendyol, a Turkey-based e-commerce platform in which Alibaba invested $728 million in 2018. Early last year, Alibaba announced a $2 billion investment in Trendyol to expand its presence in regional markets, and the platform is now available in the United Arab Emirates as well.

In order to avoid being subject to heavy cross-border tariffs, the company has strategically invested in localized logistics in Europe, a strategy the company is likely to replicate in most of its key international markets.

Alibaba, despite being in the crosshairs as a result of the trade war between the U.S. and China, is well-positioned to leverage its AI investments to boost revenue growth in the next five years. Wall Street analysts expect Alibaba’s revenue to grow in high single digits in the next three financial years. The company’s attractive valuation compared to its U.S. peers is what makes Alibaba an interesting stock for long-term-oriented investors. Alibaba is cheap compared to both e-commerce and AI leaders in the Western world.

This cheap valuation stems from two factors.

1. Trade tensions between the U.S. and China.

2. Chinese government’s crackdown on tech companies.

Although trade tensions are unlikely to improve, the Chinese government’s crackdown on the tech sector seems to be over. Chinese officials have pledged to support the domestic tech sector at this important juncture, which is evident from President Xi Jinping appearing alongside Jack Ma after many years. When it comes to trade tensions, Alibaba is unlikely to be affected to a degree where the company’s profitability will deteriorate given that its primary focus is the local market.

Alibaba seems cheaply valued in the market but investors may have to keep a close eye on the company’s international expansion efforts to identify any potential inflection points.

While many retail investors have shown a risk aversion toward Chinese tech stocks due to their exposure to geopolitical risks, some renowned investors with deep expertise in international stock markets are going against the grain by concentrating heavily on Chinese tech names. Among these investors, Alibaba is a clear favorite.

Michael Burry (Trades, Portfolio), who famously profited by predicting the global financial crisis in 2008, has built a notable position in Alibaba in the recent past. Despite offloading some Alibaba holdings to book his profits, the guru still owned $16 million worth of Alibaba shares at the beginning of this year. As per the latest filings, Alibaba is his largest position, accounting for almost 22% of his investment portfolio.

David Tepper (Trades, Portfolio), the legendary investor behind Appaloosa Holdings, is another big believer in Alibaba’s turnaround story. After adding two million shares in the fourth quarter of 2024, Alibaba is the largest investment in the guru’s portfolio with a market value of $1.3 billion.

Alibaba has been winning the nod of approval from many other institutional investors as well. For example, Benchmark, a leading investment firm, named Alibaba one of its best investment ideas for 2025 given the company’s growing status as an AI market leader in China. The firm has a price target of $160 for Alibaba, which implies substantial upside from the current market price of around $100.

Alibaba, the Chinese e-commerce giant, is aggressively investing in AI to become the AI market leader in China. These investments have already helped the company’s Qwen generative AI model emerge as one of the best generative AI tools in the country. In the long term, planned AI investments will help all business segments of the company. Although Alibaba will be impacted by newly imposed tariffs on Chinese imports, the company has what it takes to survive this onslaught and thrive in the long term aided by expansion into fast-growing international markets and its localized market strategy.

This article first appeared on GuruFocus.