Summary

• BABA's deep value prospects cannot be ignored indeed, attributed to its well diversified capability across commerce, logistics, cloud computing/AI, autonomous driving, and fintech.

• This reason may also be why AAPL has chosen to work with BABA's multi-modal Qwen2.5-VL in China, building upon the former's partnership with OpenAI globally.

• Most importantly, the Qwen2.5 has already emerged a supposed winner against DeepSeek, OpenAI’s GPT-4o, Anthropic’s Claude 3.5 Sonnet, and GOOG's Gemini 2.0 Flash.

• Despite the AAPL-induced rally, we believe that BABA's rally still has legs with a triple digit upside potential thanks to its overly discounted valuations.

• For now, our Buy rating comes with one caveat for an improved margin of safety.

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BABA Is Inherently Undervalued - Offering Opportunistic Investors With The Rich Return Prospects

We previously covered Alibaba Group Holding Limited (NYSE:BABA) in December 2024, discussing its robust recovery prospects ahead, attributed to the seemingly thawing relationship between the US and China, pending further policy clarity in 2025.

Combined with the impressive in-house AI capability, robust international e-commerce growth, rich Free Cash Flow generation, and overly discounted valuations, we had believed that stock was likely to offer rich double-digit capital appreciation over the next few years, resulting in our reiterated Buy rating.

BABA 1Y Stock Price

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Since then, BABA has had an impressive stock price recovery by +44.2%, with it well outperforming the wider market at +2.9% and many of its commerce/cloud peers in varying degrees.

Much of the early tailwinds are attributed to the supposedly softening stance observed in the US President Donald Trump and China's top diplomat, Foreign Minister Wang Yi, with it underscoring a potential reversal in market sentiments surrounding Chinese ADRs after the worst of the ANT fiasco.

At the same time, it goes without saying that BABA's true capability has been greatly dismissed thus far, attributed to its well diversified capability across commerce, logistics, cloud computing/in-house AI team, autonomous driving, and fintech offerings.

This is also why we believe that the world has overreacted to the threat supposedly posed by DeepSeek, since the latter is not the first LLM to outperform those released by US based Big Tech companies.

Our optimism arises from BABA's recently released multi-modal Qwen2.5-VL, which the management has been purported to outperform "Microsoft-backed (MSFT) OpenAI’s GPT-4o, Amazon-backed (AMZN) Anthropic’s Claude 3.5 Sonnet, and Google’s (GOOG) (GOOGL) Gemini 2.0 Flash in math, document analysis, video analysis and question-answering evaluations."

Most importantly, the Qwen2.5 has also emerged as the clear winner in a direct test against DeepSeek R1, attributed to the former's "superior clarity, depth, reasoning, creativity, and transparency."

This reason is likely also why Apple (AAPL) has decided to partner with BABA "to bring artificial intelligence features to iPhones in China," an endeavor that builds upon the former's global partnership with OpenAI.

While it appears that BABA's tailwinds may be limited to China, we believe that the market is compelling enough to justify an extremely bullish outlook, given that it comprises 17.1% (+2.6 points YoY) of AAPL's FY2024 revenues at $66.95B (-7.7% YoY).

This is on top of the robust consumer demand for Apple Intelligence, with "markets where we had rolled out Apple Intelligence, that the year-over-year performance on the iPhone 16 family was stronger than those where Apple Intelligence was not available," thanks to the elevated "experiences across iPhone, iPad, and Mac."

This development naturally validates BABA's position as the leading AI player in China, with it potentially kickstarting more growth tailwinds ahead.

These also built upon its growing Cloud Intelligence Group revenues to $4.21B in FQ2'25 (+15.3% QoQ/+11.3% YoY) and expanding adj EBITA margins of 8.9% (+0.1 points QoQ/+3.9 YoY), as "AI-related product revenue grew at triple-digits year over-year for the fifth consecutive quarter."

These reasons are also why we believe that there is no stopping the growing data center capex trends, as similarly highlighted by the top four US-based hyperscalers in the recent Q4'24 earning season.

For reference, AMZN has guided FY2025 capex spending of $105.2B (+26.7% YoY/+523.9% from FY2019 levels of $16.86B), with the same trend observed in MSFT at $80B (+79.8% YoY/+81% from FY2019 levels of $44.18B), GOOG at $75B (+37.1% YoY/+64.4% from FY2019 levels of $45.6B), and Meta (META) at $62.5B (+59.3% YoY/+313.9% from FY2019 levels of $15.1B).

The same has been reported by BABA, with a higher capex of 46.36B Yuan over the LTM (+151.8% sequentially), mostly attributed to AI infrastructure given the "ongoing explosive growth in demand for AI for the compute power that drives AI for the API services to access the models," with it being "the kind of opportunity that probably comes along only once every 20 years, say, in terms of the ability to leapfrog technologically."

We are not overly concerned about the Nvidia (NVDA) chips export ban as well, given that "computer researchers in China using domestically made graphics processors have achieved a near-tenfold boost in performance over powerful US supercomputers" supported by NVDA's next-gen chips, according to a peer-reviewed study reported by the South China Morning Post.

This implies that BABA is likely to remain competitive compared to its US-based cloud computing counterparts moving forward, one that has been validated by its partnership with AAPL.

The Consensus Forward Estimates

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This reason is also why we believe that BABA's prospects are likely to be promising moving forward, based on the consensus forward estimates at top/bottom-line growth projections of +7.4%/+7.7% through FY2027.

Even then, given that its cloud division only comprises a 12.5% of its overall revenues in FQ2'25, readers may want to temper their expectations indeed.

This is especially since BABA's commerce segment remains its top-line driver at 55.2%, with it remaining to be seen if the robust January 2025 spending trends may be sustained over the year, given that "consumer confidence is at all-time lows."

BABA Valuations

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Combined with the Beijing crackdown after the ANT fiasco, it is unsurprising that BABA remains discounted at FWD P/E non-GAAP valuations of 13.76x, compared to the pre-crackdown 5Y P/E mean of 28x.

However, given the notable upgrade from the December 2023 bottom of 7.60x, we believe that market sentiments are already showing signs of improvement, with it likely to support the stock's upward recovery trend ahead.

So, Is BABA Stock A Buy, Sell, or Hold?

BABA 3Y Stock Price

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For now, BABA has already charted an impressive near vertical recovery to retest the 2022/2023/2024 tops of $120s ranges, as it runs away from the 50/100/200 day moving averages.

For context, we had offered a fair value estimate of $77.50 in our last article, based on the LTM adj EPS of $8.48 ending FQ2'25 (-4.6% sequentially) and the prior FWD P/E valuations of 9.15x.

It is apparent by now, that the AAPL partnership has already triggered BABA's massive rally, with it now trading beyond our prior base-case long-term price target of $97.40, based on the consensus FY2027 adj EPS estimates of $10.65.

Despite so, there remains an excellent upside potential of +51.4% to our long-term price target of $181.00 and +149.2% to our bull-case long-term price target of $298, based on the eventual upgrading in its FWD P/E valuations to the sector P/E median of 17x and the pre-crackdown 5Y P/E mean of 28x, respectively.

Unfortunately, here is where we would like to offer caution, since it appears that a softening stance between the US and China is unlikely to occur as soon as expected, attributed to the intensifying tariff wars and potential tit-for-tat response from China.

Combined with the Fed's hawkish commentary and the mixed stock market sentiments, we believe that Chinese ADR stocks, BABA included, are likely to remain highly volatile in the near-term with most traders likely to take their gains at current inflated levels.

Our caution arises from BABA's inability to break out of the $120s ranges, as similarly observed over the past three years and the stock's sideways price action since February 12, 2025.

This is on top of the increased short interest volume by +31.5% over the past four weeks and +40.6% on a YoY basis, with it underscoring why the stock's recent gains may potentially be moderated by aggressive short sellers.

This is also why our Buy rating for the BABA stock comes with the caveat that investors wait for the exuberance to be moderated for an improved margin of safety, since the stock is likely to return most of its recent gains and afterwards, pull back to its established uptrend support line at the $80s ranges, with it implying a -33% downside from current levels.

Patience may be more prudent in the meantime.