On the morning of February 15, 2024, Alibaba's stock price closed at $124.73 per share in the U.S. market, up by 4.34%. This increase extended a recent upward trend that has captured attention across global marketsThe driving force behind this rally is not merely speculative trading; significant developments in the tech landscape are reshaping perceptions of Alibaba's potential.

On February 13, Alibaba's co-founder, Joe Tsai, confirmed a collaboration between Apple and Alibaba focused on artificial intelligence (AI). Leading up to this, the emergence of DeepSeek had already sparked a wave of interest regarding AI capabilities in ChinaDeepSeek, which gained notoriety during the Lunar New Year, demonstrated substantial advancements in large model training, highlighting the increasing competitiveness of Chinese technology on the global stage.

Perhaps more critical than fluctuations in stock price is Alibaba’s exploration of a “second growth curve” driven by AIThe transformative power of AI technology has created an environment ripe for asset reevaluation, not just for Alibaba, but for other Chinese tech companies as wellThe question remains: can Alibaba leverage the AI wave to enhance its market valuation?

Reassessing Alibaba

A phrase circulating among some investors on social platforms is, “Buy Alibaba, and you get Alibaba Cloud for free.” This sentiment underscores the belief that Alibaba's strategic focus on AI, particularly in cloud computing, has carved out significant potential for growth and revenue generation.

As a result of the DeepSeek sensation, attitudes toward Alibaba have begun to shift, leading to a notable reevaluation of its market worthRecent statistics indicate that Alibaba's Hong Kong shares surged by 55.22% in a mere 20 days, while its U.S. shares climbed by 45%, reaching the highest price in nearly three yearsThese metrics are a testament to the renewed investor confidence inspired by innovations stemming from AI initiatives.

The remarkable popularity of DeepSeek points to two critical realities

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Firstly, the efficiency gains brought forth by DeepSeek, which have reduced the cost of training large models, will likely stimulate demand for cloud computing resourcesMany enterprises and individuals are now eager to engage in large model training, hence increasing the need for robust infrastructure, positioning Alibaba Cloud at the forefront of this demand.

Secondly, DeepSeek has invigorated a global conversation about China's advancements in AI technologyIts app ranked first on the iOS download charts in over 100 countries during the Lunar New Year, even surpassing ChatGPT in downloads, providing a much-needed confidence boost in the capabilities of Chinese tech firms.

In the last couple of weeks, Alibaba Cloud has further stepped into the spotlightIts recent model, Qwen 2.5-Max, released on January 29, utilizes a MoE (Mixture of Experts) architecture and is trained on over 20 trillion tokensIt ranked seventh globally on the ChatBot Arena, outperforming competitors like DeepSeek-V3 and o1-mini while maintaining high performance at reduced resource consumptionJoe Tsai's revelation that “picky Apple” ultimately chose Alibaba further exemplifies the strength of Alibaba's AI technology and enhances the company's credibility in the industry.

The question remains, can the advancements in AI lead to a lasting reassessment of Alibaba's value? Despite the recent price increases, Alibaba's stock still lags behind its historical peak by over $200 per share, which was reached in 2020. Before this current rally, the price-to-earnings ratio (PE) of Alibaba's Hong Kong shares was merely 10, and its price-to-book (PB) ratio was about 1.5, both near historical lows.

This suggests that, even though Alibaba has prioritized cloud computing alongside its e-commerce business, the market has thus far evaluated it like a traditional retail companyYet, with the emergence of new AI initiatives, there’s potential for a transformative narrative to develop.

Economists, including Pan Helin, a well-known scholar in the field, have indicated that Alibaba currently sits at a strategic table in the AI competition

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With the substantial user base Alibaba has accumulated, there is optimism that AI will propel Alibaba into a new era of valuation evolution.

Recent financial disclosures from Alibaba highlight promising growth within its cloud segmentFor the third quarter of fiscal 2024, Alibaba Cloud reported revenues of 29.61 billion yuan (approximately $4.5 billion), marking over a 7% increase year-over-year and an 11.5% increase from the previous quarterAdjusted EBITDA reached 2.661 billion yuan, representing an impressive 89% year-on-year growthThe surge in demand for public cloud services, particularly AI-related products, has fueled this growth, demonstrating the sector's considerable potential.

Nevertheless, despite these positive trends, Alibaba Cloud remains significantly overshadowed by its e-commerce counterpart, Taotian, which generated around 99 billion yuan, making up 42% of Alibaba’s total revenueIn stark contrast, Alibaba Cloud accounted for just 12.5% of total revenuesThis stark contrast indicates that while AI remains a long-term growth opportunity for Alibaba, the current scale of Alibaba Cloud and the speed of its growth make it difficult to single-handedly drive revenue performance in the short term.

Compounding this uncertainty are the dynamics of the competitive landscapeOver the past year, Alibaba’s AI business has faced challenges on the consumer-facing end (AI To C). Data from QuestMobile reveals that the overall monthly active user count of AIGC (Artificial Intelligence Generated Content) apps in China reached 120 million by the end of November 2024. Leading the pack, Doubao and Kimi accounted for 80% of traffic, while Alibaba’s Tongyi trails in seventh place with only 2.91 million monthly active users, illustrating the uphill battle Alibaba faces in consumer engagement.

Recent organizational changes at Alibaba, especially the merging of Tongyi with the company’s smart information division, indicate a shift in strategy

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However, as Alibaba navigates the complexities of cross-departmental coordination and adjusts its business model, the effectiveness and stability of its AI initiatives will be put to the test.

Overall, it is clear that cloud computing’s importance within Alibaba's business model is growingAs the company inches closer to realizing its revaluation mission, the efficacy and growth of its second growth curve hinge on ensuring that internal efforts are well integrated, positioned to leverage the momentum created by AI and surrounding investments.

An Opening for Growth?

With innovative breakthroughs like DeepSeek enhancing global investor confidence in China's tech scene, the broader market for Chinese tech stocks appears to be entering a phase of overall value reassessment.

Aside from Alibaba, numerous other Chinese tech firms have recently reported stock price increasesBy February 14, Xiaomi Group's stock surged over 7.5%, reaching historic highs, while Tencent Holdings increased by over 6.5% throughout the week, up about 10.5%. Kuaishou and JD.com grew by over 7%, and Meituan saw an increase exceeding 6%—a clear indication of the revival in market sentiments towards Chinese tech companies.

In a recent report, Morgan Stanley pointed out that global investors' valuation frameworks often remain rooted in traditional internet business models, failing to account for the advancements these companies are making in cutting-edge technology.

Moreover, the successes brought about by initiatives like DeepSeek suggest a decrease in potential constraints on China’s AI developmentInvestors are starting to realize that the path forward does not necessarily require substantial capital influx—China’s tech sector might narrow the technological gaps despite limitations in high-end GPU availabilityThe competitive focus between China and the U.S. has shifted from trade tariffs to high-end manufacturing, increasingly centering on AI, which modifies the investment logic

Spurred by supportive factors such as a vast pool of engineers, rich data resources, a mature social network, and potential governmental backing, China seems well positioned to accelerate AI integration.

Unlike the narrative of big firms cutting costs and enhancing efficiency, the continued exploration and development of frontier technologies in AI prompt a rise in investment within Chinese techWith growing recognition of Chinese AI capabilities, there are increasing expectations for an accelerated development cycle characterized by a healthy positive feedback loop.

Professor Zheng Zhigang of Renmin University of China’s Finance and Economics department stated that in a marketplace characterized by limited investment opportunities, AI has emerged as a particularly valuable segmentHe opined that as large corporations delve deeper into AI, including leveraging it to transform their traditional business models, this could create a virtuous cycle where the capital markets return value to AI technologies, which in turn generates returns for the marketSuch dynamics might lead to a sustainable growth pattern in valuation moving forward.

However, Zheng also cautioned investors regarding potential risks associated with tech innovation investmentsHe emphasized the importance of organizational strategy and management in properly fostering internal creativity and integrating AI with traditional growth trajectories to establish a robust, profitable model reaching scale.

“Stay the course and focus on your core business while letting the capital markets assign fair value,” he summarized, emphasizing the need for firms to remain anchored in their operational strengths amidst discussions surrounding revaluation in the marketplace.

Alibaba is scheduled to release its financial results on February 20, which will reveal whether its reported capital expenditures could surge to 100 billion yuan, a point of significant interest among investors

In the third fiscal quarter of 2024, Alibaba reported capital expenditures reaching 17.49 billion yuan, an increase of 239.4% year-on-year, with a considerable portion allocated for enhancing Alibaba Cloud's computational capabilities.

Competition does not rest, howeverByteDance, having significantly diversified its large model capabilities, has set ambitious targets for 2025 of reaching new levels of “intelligence.” CEO Li Yanhong of Baidu recently affirmed ongoing investments in chips, data centers, and cloud infrastructure, underscoring that major corporations recognize the growth potential and investment value in China’s AI marketplace.

The enthusiasm for AI applications within the Chinese market presents practical avenues for tech innovationRecent data from Chinese AI product rankings indicates that DeepSeek attracted significant traffic in January, posting 256 million monthly visits, outpacing Doubao and Kimi, while these competitors recorded 35.08 million and 33.50 million visits, respectivelyThe DeepSeek effect has catalyzed considerable interest in AI among Chinese consumers, prompting Quark to announce its rebranded efforts targeting a younger demographic, as more than half of its users are identified as Gen Z.

The eagerness with which various industries integrated DeepSeek during the Lunar New Year, combined with the recent statements from industry leaders regarding the significant percentage of China’s tech companies functioning on Alibaba Cloud, further solidifies the expansion of the B-end market for large models and cloud services.

Yet, hurdles remainWhile Chinese consumers currently lack robust payment habits for AI, and the exploration of commercial applications in the B-end model presents challenges, the substantial excitement surrounding large models as they kick off the “first blast of the new year” in 2025 indicates potential for further openings.

As more investors reassess the valuation frameworks applicable to Chinese tech stocks, a revitalization in stock performance is becoming increasingly apparent

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