Alibaba’s AI Chip Breakthrough: A Strategic Threat to Nvidia and a Buy Opportunity in China Tech?

Alibaba’s recent development of a domestically produced AI inference chip marks a pivotal moment in the global semiconductor landscape. As U.S. export controls restrict access to advanced Nvidia hardware like the H20 and H100, Alibaba has accelerated its push for self-sufficiency, unveiling a chip optimized for inference tasks and manufactured in China using RISC-V architecture [1]. This move not only challenges Nvidia’s dominance in the AI inference market but also signals a broader shift in the U.S.-China tech rivalry. For investors, the question remains: Is Alibaba’s chip a sustainable catalyst for reshaping the AI supply chain, and does its stock reflect undervaluation amid rapid AI cloud growth?

Strategic Shift: From Dependency to Self-Reliance

Alibaba’s new chip is designed to replace its reliance on Nvidia’s H20 for inference workloads, a critical step in mitigating the impact of U.S. export restrictions [2]. Unlike training tasks, which still depend on Nvidia’s Blackwell architecture, inference—where Alibaba’s chip excels—is now handled by a domestically produced alternative. This hybrid approach allows Alibaba to maintain operational continuity while reducing exposure to geopolitical risks [3]. The chip’s interoperability with Nvidia’s software platform further eases the transition for developers, enabling code written for Nvidia hardware to run on Alibaba’s infrastructure with minimal adaptation [4].

However, performance benchmarks remain a key unknown. While Alibaba’s chip is tailored for inference, it lacks detailed metrics such as TOPS (tera-operations per second) or power efficiency compared to Nvidia’s H100. Analysts note that Chinese firms, including Alibaba, still lag behind Nvidia in training capabilities, but inference—where Alibaba’s chip is focused—requires less computational intensity [5]. This positions Alibaba to compete in a segment where domestic alternatives can thrive, even as it continues to rely on Nvidia for high-end training.

Financials and Valuation: Growth vs. Margins

Alibaba’s cloud-intelligence segment reported a 26% year-over-year revenue increase in Q2 2025, driven by triple-digit growth in AI-related products [6]. The Cloud Intelligence Group now contributes 12.74% of Alibaba’s total revenue, underscoring its strategic importance. However, profit margins remain under pressure. The segment’s adjusted EBITA margin stands at 8.8%, significantly below the company’s average of 16%, due to aggressive pricing and capital expenditures [7].

Despite these challenges, Alibaba’s valuation appears compelling. With a P/E ratio of 14.04, the stock is modestly overvalued relative to peers, but this reflects market skepticism about short-term profitability rather than long-term potential [8]. The company’s $53 billion three-year investment plan in AI and cloud infrastructure—funded by a 26% revenue growth in the cloud segment—suggests a commitment to scaling its AI ecosystem [9]. For investors, the key question is whether Alibaba can sustain its cloud growth while improving margins, a challenge compounded by competition from global giants like AWS and Microsoft.

Geopolitical Tailwinds and Risks

The geopolitical context cannot be ignored. U.S. export controls have created a void in China’s access to advanced AI hardware, accelerating domestic innovation. Alibaba’s chip is part of a broader national effort, with Huawei and Cambricon also developing alternatives to Nvidia [10]. While these chips may not yet match Nvidia’s performance, they are gaining traction in inference workloads, where Alibaba’s focus lies.

Nvidia, meanwhile, is reportedly developing a new chip for the Chinese market that outperforms the H20 [11]. This underscores the competitive dynamic: Alibaba’s chip threatens Nvidia’s inference dominance, but Nvidia’s potential new product could reassert its lead in training. For now, Alibaba’s hybrid strategy—using its chip for inference and Nvidia for training—appears pragmatic, but long-term sustainability will depend on whether domestic training capabilities can catch up.

Is Alibaba Undervalued?

Alibaba’s stock has surged on strong cloud performance and AI progress, but its valuation remains anchored by concerns over margins and geopolitical risks. The company’s P/E ratio of 14.04 is lower than the S&P 500 average, suggesting potential undervaluation if AI cloud growth continues to outpace expectations [12]. However, free cash flow fell by 76% in Q2 2025 due to aggressive infrastructure spending, raising questions about short-term profitability [13].

For investors, the calculus hinges on Alibaba’s ability to balance growth with margin improvement. If the company can leverage its AI chip to reduce costs and capture market share in inference workloads, its valuation could re-rate upward. Conversely, persistent margin pressures or regulatory setbacks could dampen its potential.

Conclusion: A Calculated Bet in a Shifting Landscape

Alibaba’s AI chip represents a strategic, if incomplete, challenge to Nvidia’s dominance. While it lacks the training capabilities to fully replace Nvidia’s high-end offerings, its focus on inference aligns with China’s immediate needs and geopolitical realities. For investors, the move offers a glimpse into a future where U.S. and Chinese tech ecosystems diverge, with Alibaba positioned as a key player in the latter.

The stock’s valuation, though modestly overvalued, may not fully reflect the long-term potential of Alibaba’s AI cloud growth or its role in reshaping the semiconductor supply chain. However, risks remain: margin pressures, regulatory uncertainties, and the pace of domestic innovation will all influence Alibaba’s trajectory. For those willing to navigate these complexities, Alibaba’s AI chip breakthrough could signal a compelling, if speculative, opportunity in the evolving AI landscape.

Source:
[1] Alibaba unveils AI chip as China races to close gap with Nvidia [https://finance.yahoo.com/news/alibaba-unveils-ai-chip-china-093837562.html]
[2] Alibaba looks to end reliance on Nvidia for AI inference [https://www.theregister.com/2025/08/29/china_alibaba_ai_accelerator/]
[3] The Alibaba AI Chip Disruption: What It Means for Nvidia [https://www.ainvest.com/news/alibaba-ai-chip-disruption-means-nvidia-ai-ecosystem-2508/]
[4] New Alibaba AI Chip Could Replace Nvidia Hardware in ... [https://www.eweek.com/news/alibaba-ai-chip/]
[5] China's Alibaba Develops New AI Chip to Help Fill Nvidia ... [https://money.usnews.com/investing/news/articles/2025-08-29/chinas-alibaba-develops-new-ai-chip-to-help-fill-nvidia-void-wsj-reports]
[6] Alibaba's cloud-computing business is thriving, and it has a new AI chip in the works [https://www.morningstar.com/news/marketwatch/20250829214/alibabas-cloud-computing-business-is-thriving-and-it-has-a-new-ai-chip-in-the-works-the-stock-is-rising]
[7] Alibaba Doubles Down on AI Margins: Time to Hold or Cut ... [https://www.nasdaq.com/articles/alibaba-doubles-down-ai-margins-time-hold-or-cut-your-losses]
[8] Alibaba Stock Surges After Earnings Beat and AI Chip ... - TECHi [https://www.techi.com/alibaba-stock-surges-ai-chip-strategy-vs-nvidia/]
[9] Alibaba Group Announces March Quarter 2025 and Fiscal ... [https://www.nasdaq.com/press-release/alibaba-group-announces-march-quarter-2025-and-fiscal-year-2025-results-2025-05-15]
[10] Alibaba Joins Chip Race As Nvidia Faces China Curbs [https://finance.yahoo.com/news/alibaba-joins-chip-race-nvidia-202412136.html]
[11] Nvidia working on new AI chip for China that outperforms ... [https://www.reuters.com/world/china/nvidia-working-new-ai-chip-china-that-outperforms-h20-sources-say-2025-08-19/]
[12] Alibaba (BABA) June quarter 2025 earnings report [https://www.cnbc.com/2025/08/29/alibaba-baba-june-quarter-2025-earnings-report.html]
[13] Alibaba Doubles Down on AI Margins: Time to Hold or Cut ... [https://www.nasdaq.com/articles/alibaba-doubles-down-ai-margins-time-hold-or-cut-your-losses]