To The Moon

$Alibaba(BABA)$

Alibaba Group (NYSE: BABA) has long been regarded as one of China’s most important technology conglomerates, but over the last several years, the company’s reputation with investors has been tested. From Beijing’s regulatory crackdowns to intensifying domestic competition and U.S. geopolitical restrictions, Alibaba has faced challenges that reshaped how global markets view the stock.

Now, in 2025, the company is trying to write its next chapter. The latest earnings report contained one particularly notable development: Alibaba unveiled a new artificial intelligence chip designed to help fill the vacuum left by U.S. export restrictions on Nvidia’s high-end GPUs. The announcement triggered immediate investor enthusiasm, sending the stock up nearly 10% in a single session.

The significance is clear. China has been searching for viable substitutes to Nvidia and AMD’s advanced chips, which are essential for AI training and inference. If Alibaba’s chip can perform competitively, it could not only support the company’s cloud division but also help cement its role in the broader Chinese AI ecosystem.

However, the financial picture is not without complications. Alibaba recorded a net free cash flow outflow of RMB 18.815 billion during the quarter, reflecting heavier investments in cloud infrastructure and new e-commerce initiatives like “Taobao Flash Sales.” Additionally, food delivery and other lower-margin businesses continue to weigh on profitability.

This brings investors to a critical question: Can Alibaba transform its AI ambition into a true growth engine, and does this justify holding the stock until it potentially re-rates toward $150?

A Brief Look Back: From Growth Darling to Cautious Hold

To fully appreciate where Alibaba stands today, it helps to recall its trajectory.

• 2014 IPO: Alibaba went public on the NYSE in what was then the largest IPO in history, raising $25 billion. The company was positioned as the “Amazon of China,” with e-commerce operations that dominated the market.

• Earnings Growth Era (2015–2019): Alibaba diversified into logistics, payments (Alipay/Ant Group), and cloud computing. The business consistently posted double-digit revenue growth, becoming one of the largest global internet companies.

• Regulatory Crackdown (2020–2022): Chinese regulators halted Ant Group’s IPO, launched antitrust probes, and imposed stricter oversight on tech giants. Alibaba’s valuation collapsed as investors reassessed the risks of political interference.

• Competitive Pressures (2023–2024): Pinduoduo, JD.com, Douyin (TikTok’s Chinese sister), and Meituan began eating into Alibaba’s dominance. At the same time, cloud growth slowed, as companies tightened IT budgets amid economic uncertainty.

By 2025, Alibaba remains a massive platform with hundreds of millions of active users, but its stock is a fraction of its peak. This makes the new AI chip announcement all the more consequential—it represents a chance for Alibaba to reignite excitement and re-establish relevance in China’s digital economy.

Why Alibaba’s AI Chip Matters

The U.S. has banned exports of Nvidia’s most advanced chips (A100, H100, and their successors) to China. This created an immediate bottleneck for companies seeking to build generative AI applications, train large language models, or expand data center capacity.

Filling the Gap Left by Nvidia

Alibaba’s AI chip is designed to compete in this restricted environment:

• Domestic Substitution: Without access to U.S. technology, Chinese firms must innovate internally. Alibaba, along with Huawei and Baidu, is stepping up to create alternatives.

• Strategic Sovereignty: For Beijing, AI is a “strategic industry,” and self-sufficiency in critical hardware is considered a national priority. Alibaba’s participation directly supports this policy goal.

• Ecosystem Integration: By developing in-house chips, Alibaba can vertically integrate its cloud platform, offering customers not only compute power but also optimized AI tools and services.

Potential Advantages

If Alibaba executes successfully, several advantages emerge:

1. Strengthened Alibaba Cloud: Already one of the largest cloud providers in China, integrating proprietary chips could help Alibaba lower costs, improve performance, and differentiate from competitors.

2. AI-as-a-Service Expansion: Chinese enterprises across healthcare, finance, logistics, and retail are eager to adopt AI solutions. A competitive AI chip would allow Alibaba to provide turnkey AI infrastructure.

3. Strategic Moat: Proprietary chips could reduce reliance on third-party suppliers, improving supply chain resilience.

Execution Challenges

That said, designing and manufacturing competitive semiconductors is a monumental task:

• Foundry Limitations: Alibaba will likely depend on Semiconductor Manufacturing International Corporation (SMIC), which still lags TSMC in cutting-edge process nodes.

• Benchmarking: Until independent tests show how Alibaba’s chip stacks up against Nvidia’s performance, investor excitement is largely speculative.

• Adoption Risk: Convincing clients to migrate workloads onto a new, unproven architecture is not guaranteed.

In short, Alibaba’s chip is a necessary step for China’s AI ecosystem but remains unproven as a profitable growth driver.

Financial Snapshot: The Cash Burn Question

Alibaba’s latest quarterly earnings reflected both promise and pressure.

• Revenue: Core e-commerce operations continue to grow modestly, driven by resilient consumer demand and Taobao/Tmall’s entrenched user base.

• Cash Flow: Free cash flow recorded a net outflow of RMB 18.815 billion. This is significant, as Alibaba traditionally generated strong cash flows from its e-commerce engine. The outflow largely reflects heavy cloud capex and subsidies tied to Taobao Flash Sales.

• Profitability: Food delivery, logistics, and international expansion continue to drag on margins. These segments are strategically important but face stiff competition, limiting profitability in the short term.

• Balance Sheet: Alibaba still maintains a healthy cash balance, providing flexibility to fund investments, but sustained outflows could test investor patience if monetization lags.

In other words, Alibaba is spending heavily today in hopes of securing tomorrow’s leadership in AI and e-commerce.

Competitive Landscape: Can Alibaba Hold Its Ground?

Alibaba’s competitive environment is arguably its most pressing challenge.

1. E-Commerce:

   Pinduoduo (PDD Holdings): Known for its low-cost group-buying model, Pinduoduo has been siphoning market share from Alibaba, especially among lower-tier city consumers.

   Douyin (TikTok in China): The rise of social commerce through livestreaming has given Douyin a powerful channel to capture retail spending, particularly among younger demographics.

2. Cloud Computing:

   Huawei Cloud: Benefiting from its own chip development efforts, Huawei has been expanding aggressively in the enterprise sector.

   Tencent Cloud: Another strong competitor, leveraging its gaming and social platforms to win enterprise clients.

3. Food Delivery & Local Services:

   Meituan: The clear leader in food delivery, making Alibaba’s Ele.me platform a distant second. This division remains an uphill battle for profitability.

Alibaba must fend off rivals across multiple fronts while simultaneously pursuing new growth bets in AI and chips.

Valuation and Market Sentiment

Despite these challenges, Alibaba’s stock still looks undervalued by traditional metrics.

• Valuation Multiples: BABA trades at a significant discount compared to its U.S. peers. Its forward price-to-earnings (P/E) ratio hovers in the low teens, versus Amazon’s valuation closer to the mid-20s.

• Sum-of-the-Parts: If one were to value Alibaba’s e-commerce, cloud, logistics, and fintech stakes separately, the implied fair value could be meaningfully higher than today’s market price.

• Analyst Targets: Many analysts suggest fair value in the $120–$150 range, assuming steady recovery in e-commerce and meaningful contributions from cloud and AI.

The gap between market price (~$80s) and potential fair value highlights the opportunity—but also the skepticism. Investors remain wary of geopolitical risks, regulatory oversight, and execution missteps.

Risks to Watch

Investors considering Alibaba must weigh several risks carefully:

1. Geopolitical Risk: U.S.-China tensions remain high, with potential for additional sanctions or restrictions. Any escalation could directly impact Alibaba’s global ambitions.

2. Regulatory Oversight: While Beijing has recently softened its stance, the risk of sudden policy shifts cannot be ignored.

3. Execution Risk in AI: Designing a chip is one thing; mass production, adoption, and profitability are another. Failure here could turn enthusiasm into disappointment.

4. Competitive Pressure: Rivals like Pinduoduo and Meituan show no signs of slowing down. If Alibaba fails to defend market share, even the best AI chip may not offset e-commerce erosion.

Investor Takeaway: Hold With Patience

So, should investors hold Alibaba stock until $150?

The answer depends on one’s time horizon and risk tolerance.

• For Long-Term Investors: Alibaba offers significant upside potential if its AI and cloud strategies succeed. At current valuations, the risk/reward looks attractive, though patience will be required.

• For Short-Term Traders: The stock may remain volatile, reacting sharply to headlines on chip performance, regulatory changes, or macro data out of China.

• Consensus View: Alibaba is not a “sell” despite its challenges, but it may not yet be a “strong buy” either. A measured hold seems appropriate until more evidence emerges about the AI chip’s real-world performance and monetization potential.

Verdict: Alibaba is a hold, with potential upside toward $150 if execution improves. The chip announcement is encouraging, but investors should wait for concrete proof of adoption before assigning it long-term growth driver status.

Final Thoughts

Alibaba’s journey has always been defined by ambition. From revolutionizing Chinese e-commerce to building one of the world’s largest cloud platforms, the company has never shied away from bold moves. The new AI chip is the latest in this tradition—an attempt to assert leadership in a critical technology race that will shape the future of China’s digital economy.

For investors, the challenge is balancing optimism about Alibaba’s innovation with realism about its financial pressures and competitive landscape. The stock’s discounted valuation provides a cushion, but whether it can truly re-rate toward $150 will hinge on the company’s ability to prove that AI is not just a marketing buzzword but a genuine growth catalyst.

Until then, cautious optimism is the name of the game.