Alibaba's Burgeoning AI Growth Hides Tremendous Potential

Alibaba: An AI Growth Story Unfolding

In recent years, tech companies have experienced significant growth fueled by artificial intelligence (AI). And while the growth may be slowing down for some businesses, there are others that are still doing well and are even in their early growth stages. One company that has been producing some terrific AI-powered growth is Chinese tech giant Alibaba Group Holdings (BABA). Although its recent earnings numbers didn't look terribly impressive at first glance, underneath the hood, its AI business has been taking off.

Alibaba's AI Business Grows by Triple Digits, Again

Last month, Alibaba reported its quarterly results for the period ending June 30. At first glance, they didn't appear to be that impressive, as its top line rose by just 2% year over year, totaling $34.6 billion. However, when excluding businesses it has recently divested itself of, its growth rate would be around 10%. Its cloud business experienced 26% revenue growth, and what was particularly impressive was that its AI-related product sales grew by triple digits for an eighth straight quarter. The company's business centers around e-commerce, which is why although Alibaba is experiencing strong AI growth, the top line may not be moving as significantly. The company's international and domestic commerce segments generated a combined $24.4 billion in revenue this past quarter, accounting for around 71% of its top line. Alibaba's broad and large business means it may take a while before AI gets big enough to make a larger impact on the top line, but the good news is the business is demonstrating some strong growth from it.

Big Ambitions for AI

What's exciting for observers is that Alibaba is producing good AI-related growth, and it's still in the early innings when looking at the bigger picture. The development of sophisticated AI infrastructure is a critical piece of China's broader technological ambitions, positioning Alibaba at the heart of this evolution. The company has its own AI chatbot, Qwen, which can do many of the same things ChatGPT can do, including generating video. Although it may not be as widely popular or well-known as ChatGPT, the company's AI model could be a formidable option for users, particularly in China. Not only could it enhance the company's existing products and services, but it may become a key driver of revenue growth in the future. The focus on local language support and integration into the Chinese digital ecosystem could give Qwen a significant edge. Alibaba has also been making its own AI chip, in an effort to become less dependent on U.S. companies and potentially fill a significant need in the Chinese market. Nvidia CEO Jensen Huang says China's AI market is worth around $50 billion and growing by an estimated 50% annually. This strategic move aligns with China's push for self-reliance in critical technologies. One tech company that has shown confidence in Alibaba is Apple, which partnered with the Chinese company earlier this year to help develop AI features for its new iPhones. This collaboration demonstrates the value and potential of Alibaba's AI capabilities on a global scale.

Alibaba: Undervalued with Significant Upside?

Year to date, shares of Alibaba are up around 66% (as of Monday). The stock still trades at a fairly low price-to-earnings multiple of 16. With tremendous AI growth prospects and a strong presence in a huge market like China, the business could get much larger and more valuable in the future. The stock looks relatively inexpensive when compared to the broader markets, as the average S&P 500 stock trades at around 25 times its trailing earnings. Alibaba has come a long way in the past year. The company's strategic focus on AI, coupled with its vast data resources and market reach, positions it well for long-term growth and success. Its increasing investments in research and development, particularly in AI, demonstrates its commitment to innovation.