Will Alibaba’s $53B AI Bet Be the Key to Tech Supremacy?

Key Points

• Alibaba shares are soaring in 2025, fueled by impressive earnings and strong market momentum.
• The company is investing tens of billions in cloud computing and AI, positioning itself for long-term growth.
• As China races to compete with the U.S. in AI, Alibaba is poised to be one of the biggest beneficiaries.

Shares of Alibaba Group NYSE: BABA are on a tear to start off 2025. The consumer discretionary and tech stock is up by 52% this year as of the Feb. 25 close. The company’s cloud computing business impressed investors in its latest earnings release on Feb. 20.

Shares rose 8% in response. A few days later, Alibaba said it plans to spend more than $52 billion on cloud computing and AI infrastructure in the next three years.

So, what should we make of these recent developments around Alibaba? Will its strength continue and allow the stock to be a big long-term winner? I’ll look to answer these questions by diving into the firm’s recent earnings and analyzing its strategic positioning.

Breaking Down Alibaba’s Impressive Earnings Results

In Alibaba’s latest results, its revenues were essentially in line with what analysts expected. However, the big beat came on adjusted earnings per share. Its $2.95 figure surpassed forecasts by over 10%. Growth in the company’s cloud intelligence and international digital commerce segments was impressive. The former grew by 13%, and the latter by 32%.

Impressively, Cloud Intelligence revenue growth has been accelerating every quarter for some time now. In Q4 2023, this part of the business grew by less than 3%. Chief Executive Officer (CEO) Eddie Wu mentioned that AI-related products have been key to this. Revenue from these products grew by over 100% for the sixth consecutive quarter. Its Chinese e-commerce segment, known as Taobao and Tmall, saw sales rise moderately by 5%.

Understanding BABA’s Cloud and AI Position

Alibaba’s $53 billion investment plan for cloud and AI infrastructure over three years equates to around $18 billion a year. That’s significantly less than the approximately $40 billion Microsoft NASDAQ: MSFT is looking to invest over just the next two quarters. However, it is still very large when considering that Alibaba’s cloud business is much smaller.

The company's cloud revenue reached $14 billion in the last year. Microsoft's Intelligent Cloud revenue of nearly $26 billion just last quarter completely dwarfs this amount. However, compared to the size of its cloud computing business, Alibaba's planned spending is significantly larger.

To be clear, Alibaba isn’t competing directly with companies like Microsoft. It is competing with other Chinese companies in cloud computing. Still, comparing this planned spending highlights that the race to "win AI" isn't just happening among U.S. companies. Many see advancing AI as an existential national security issue, and China can’t simply sit still.  

Winners will emerge in that country just as they will in the United States. As of Q3 2024, Alibaba held the largest market share of cloud infrastructure revenue in China at 36%. That is almost double that of the next closest player. Right now, Alibaba appears to be the leading horse and is making a huge commitment going forward.

Government-Related Considerations and Final Thoughts on BABA

For several years now, investing in the Chinese stock market has been difficult. Over the past five years, the iShares MSCI China ETF NASDAQ: MCHI has provided a total return of -4%. In the same period, the S&P 500 Index has had a return of nearly 99%. Government interference in the economy has caused major turmoil. Many investors avoid the country's stocks completely. However, this also suggests that these stocks may have significant potential to appreciate.

In my view, the Chinese government must unleash its private tech companies to compete with the U.S. in AI. There is evidence that tensions between government officials and tech leaders in the country are easing.

Chinese President Xi Jinping had a rare meeting recently with key Chinese tech leaders, including Alibaba founder Jack Ma. The meeting was pro-business, indicating the government is moving toward working more with its tech companies than against them.

Overall, someone is going to have to help China advance its cloud and AI technology. There doesn’t appear to be anyone more equipped to do that at this point than Alibaba. Given trends in the business and Chinese government signaling, I’m bullish on shares of Alibaba. Some Wall Street analysts see the near-term rally as far from over as well. The average implied upside of seven price targets tracked by MarketBeat post earnings is 24% as of the Feb. 25 close.