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While Alibaba (BABA) stock had a strong start to the year, it has looked weak over the last three months, gaining just 1.4% over the period. The stock is still up a handsome 27% for the year, but trades 27% below its 2025 highs. In this article, we’ll discuss why BABA stock looks like a strong buy following its recent underperformance.
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To begin with, let’s look at the reasons behind the recent weakness in Alibaba stock. Alibaba’s recent financial performance has underwhelmed, and the company missed March quarter earnings by a mile, with its profits coming in at just about half of what analysts were expecting. It is also facing intense competition in China from the likes of PDD (PDD), JD.com (JD), and TikTok’s parent company, ByteDance, and markets are apprehensive about the potential losses in the instant delivery business, given the fierce price war in that market.
Last week, Alibaba completed the sale of bonds worth $1.5 billion that are exchangeable into shares of Alibaba Health Information Technology, after which the stock saw selling pressure. Finally, the lack of any new major stimulus measures from China has also put pressure on names like Alibaba.
Despite these challenges, BABA remains a Wall Street favorite and is rated as a “Strong Buy” by 19 of the 21 analysts covering the stock. One analyst each rates it as a “Moderate Buy” and “Hold,” while the mean target price of $163.12 is nearly 50% higher than current price levels. Alibaba stock trades even below the Street-low target price of $140, while the Street-high target price of $180 is over 65% higher.
Analysts’ optimism towards Alibaba seems related to its tepid valuations. The stock trades at a forward price-earnings (P/E) multiple of 11.57x while the P/E-growth (PEG) multiple is 0.47x. While such low multiples are almost unheard of for U.S. tech stocks, the valuations of Chinese tech companies have taken a structural hit following the tech crackdown of 2021, and U.S.-China trade tensions are not helping matters either.
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Alibaba’s growth has visibly slowed down as first, the Chinese economy is no longer the kind of growth engine that it once was, and second, there is intense competitive pressure that’s putting pressure on Alibaba’s top-line growth and margins.
That said, the company is positioning itself for the next era of growth. For instance, it is looking to expand its target market and is doubling down on instant commerce, which its CEO of e-commerce business, Fan Jiang, termed as the new “racetrack” for the company. Alibaba is advancing in AI, and during its fiscal Q4 earnings call, it said that its revenues of AI products and services have grown in triple digits for the last seven consecutive quarters. The company has vowed to invest over $50 billion over three years to expand its AI capabilities.
Given China’s strict data policies, any foreign company looking to offer AI services in China might need to partner with domestic Chinese companies, which is an opportunity for Chinese AI giants like Alibaba.
Alibaba has partnered with German auto giant BMW (BMWKY) to bring AI to its cars. It is also collaborating with Apple (AAPL) to bring “Apple Intelligence” features to iPhones in China. While that deal is reportedly facing scrutiny in the U.S., the Cupertino-based company might eventually need to partner with a Chinese company to bring its AI features to China.
Cloud is another key growth driver for Alibaba, and the company is the biggest cloud service provider in Asia and the fourth largest globally, after Amazon (AMZN), Microsoft (MSFT), and Google (GOOG). Alibaba is also investing in its international operations, which will help it expand its target market.
Over the medium to long term, listing its fintech subsidiary Ant Financial would also help Alibaba unlock value. For context, that IPO was halted by China in 2020, apparently to target Alibaba’s co-founder, Jack Ma. The country’s leadership has since reconciled not only with Alibaba (and Ma), but also with its private tech sector, which it previously cracked down on.
The higher capex toward AI could take a toll on Alibaba’s profitability and cash flow in the near term. That’s, however, a common theme for U.S. hyperscalers. The aggressive pivot towards instant commerce will also hit Alibaba’s profitability, and earlier this month, the company outlined a $7 billion subsidy spread over 12 months to boost adoption.
However, given the somber valuations, I believe Alibaba stock is a good buy for someone willing to hold the stock for at least a couple of years. The company’s current initiatives should pay off in the medium to long term, and the current weakness is a good opportunity to buy shares of this beaten-down tech name.
On the date of publication, Mohit Oberoi had a position in: BABA, JD, AAPL, AMZN, MSFT, GOOG. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
