If you’re considering investing in Nvidia, you might be hesitant due to its steep valuation. Although the chipmaker has impressive growth prospects, is it worth paying over 70 times earnings for it? While many have eagerly purchased Nvidia shares, propelling its market cap to $3 trillion with a 150% surge this year, the lofty valuation raises concerns about future returns.
For those cautious about Nvidia’s valuation, exploring other AI stocks with significant upside potential could be wise. One such stock to watch is Alibaba Group (NYSE: BABA).
Expanding Horizons with AI at Alibaba
Alibaba, a tech powerhouse in China, is not limiting itself to domestic success. The company is eyeing international growth opportunities and leveraging AI to assist sellers on its platform in reaching global customers with ease.
Utilizing AI tools, merchants can overcome language barriers, resolve customer disputes efficiently, and streamline product descriptions. With its proprietary language model, Tongyi Qianwen, Alibaba aims to offer tailored and enhanced support, potentially outperforming its competitors like Shopify in aiding merchants to expand their customer base.
According to Zhang Kaifu, Alibaba’s AI development lead in international e-commerce, internal tests showed that AI tools boosted merchants’ order growth by up to 30%.
Unveiling Growth Potential
Alibaba’s international commerce segment, while currently a small part of its business, presents ample room for expansion. In the first quarter of 2024, the company reported $3.8 billion in revenue from international commerce, constituting 12% of its total $30.7 billion revenue. Impressively, with a 45% year-over-year growth rate, it emerged as Alibaba’s fastest-growing business unit, with Chinese commerce revenues leading the way.
By prioritizing international growth within a modest segment of its operations, Alibaba is positioning itself for substantial future opportunities, particularly as it harnesses AI to drive this expansion.
The Remarkably Low Valuation of Alibaba
Chinese stocks have faced challenges in recent years, including regulatory uncertainties, domestic issues, and US-China tensions. Alibaba’s stock plummeted by 64% over the past three years amidst these concerns.
Despite the prevailing discount on Alibaba’s stock due to perceived risks, the company boasts diversified operations in cloud services, e-commerce, and digital media, offering exposure to China’s vast market. At a time when many tech stocks command high earnings multiples, Alibaba stands out as remarkably undervalued, even when compared to its historical metrics.
Over the past decade, Alibaba’s average P/E ratio hovered around 36, dropping to around 30 in the last five years, well below current levels. While opinions differ on Alibaba’s growth trajectory, its recent quarter showed a 7% sales increase. If AI fuels the company’s international expansion, a growth acceleration could be on the horizon.
Despite apprehensions surrounding its Chinese origin, the extent of the discount on Alibaba’s stock seems unwarranted.
Considerations for AI Investors
Alibaba represents an underappreciated AI investment opportunity. Although its growth rate may not dazzle, the long-term potential of the business remains promising. Concerns regarding potential Chinese government interventions hindering Alibaba’s growth have yet to materialize, suggesting exaggerated fears.
Venturing beyond uncertainties and embracing Alibaba’s current undervaluation might lead to substantial gains down the road.
Is Investing in Alibaba Group Right for You?
Before diving into Alibaba Group stock, ponder this:
The Motley Fool Stock Advisor analysts have pinpointed what they believe are the 10 best stocks for investors now, and Alibaba Group didn’t make the cut. These selected stocks are anticipated to generate significant returns in the coming years.
Reflect on the example of Nvidia, which appeared on the list back on April 15, 2005, and a $1,000 investment at that time would have yielded a remarkable $751,180!*
The Stock Advisor service has outperformed the S&P 500 fourfold since 2002*, offering investors a structured path to success with regular updates and two new stock picks monthly.
*Stock Advisor returns as of July 22, 2024.