Alibaba's AI-Driven Valuation Re-Rating: A Strategic Buy Opportunity Amid Margin Pressures?

In the ever-shifting landscape of global tech investing, Alibaba Group (BABA) has emerged as a paradox: a company with dominant market positions, robust cash flows, and aggressive AI investments, yet trading at a significant discount to its historical valuations and peers. For contrarian investors, the question is whether this dislocation represents a mispricing opportunity or a warning sign of structural challenges.

Margin Pressures and Operational Resilience

Alibaba's Q3 2025 earnings report revealed a mixed but encouraging picture. The company's operating margin expanded by 50 basis points to 25.3%, driven by reduced impairment of intangible assets and higher adjusted EBITDA. Simultaneously, its gross margin hit 39.32%, reflecting improved efficiency in core operations. These metrics suggest that Alibaba's cost discipline and strategic focus on AI and cloud infrastructure are beginning to pay off.

The cloud business, in particular, grew 34% year-over-year, with AI-related revenue surging at a triple-digit rate for eight consecutive quarters.

However, margin pressures persist. Alibaba's gross margins, while up from 41.2% in recent periods, still lag behind those of AWS and Microsoft Azure, which benefit from more scalable infrastructure and higher monetization rates. This gap underscores the competitive challenges Alibaba faces in the global cloud market, where AWS grew 20% year-over-year in 2025 compared to Alibaba's 6%.

Valuation Metrics: A Tale of Two Markets

Alibaba's valuation multiples tell a story of undervaluation relative to its high-growth tech peers. As of 2025, the company trades at a forward P/E of 18.63, significantly lower than Amazon's 35.23 and Microsoft's 30.08. Its PEG ratio, at around 20x, also contrasts sharply with U.S. tech giants like NVIDIA and Microsoft, which have PEG ratios above 1x. This disparity reflects divergent growth expectations: while Wall Street projects rapid AI-driven expansion for U.S. firms, Alibaba is viewed through a lens of regulatory risks and macroeconomic headwinds in China.

Tencent, Alibaba's Chinese peer, offers a useful comparison. With a P/E of 24.3–25.82 and a PEG of 1.59, Tencent commands a premium despite similar exposure to China's regulatory environment. This suggests that Alibaba's discount may be more about its business mix-reliance on e-commerce versus Tencent's social media and gaming dominance-than fundamental weaknesses.

AI Infrastructure: A Strategic Bet or a Capital-Intensive Gamble?

Alibaba's investment in AI infrastructure is a bold move to reduce reliance on U.S. suppliers and position itself as a global AI leader. The company is already seeing traction: its Cloud Intelligence division is developing proprietary AI chips, and partnerships with Nvidia are accelerating physical AI capabilities. Morningstar estimates that Alibaba's data center energy use could grow 10-fold by 2032, a sign of its commitment to scaling AI infrastructure.

Yet, this strategy comes with risks. Alibaba's cloud revenue growth of 6% in Q3 2025 pales next to AWS's 20% growth, and its negative free cash flow raises questions about sustainability. A discounted cash flow (DCF) analysis suggests an intrinsic value of $260.97 per share, a 38.4% discount to its current price, but this assumes successful execution of its AI monetization plans.

Contrarian Case: A Re-Rating Awaits

For contrarian investors, Alibaba's valuation discount is a compelling anomaly. The company generates $150.5 billion in LTM cash from operations, maintains a dominant 60%+ share in China's e-commerce market, and is expanding internationally through its logistics and payment networks. If China's macroeconomic conditions stabilize and Alibaba's AI investments translate into monetizable products (e.g., enterprise AI tools, robotics, or autonomous vehicles), a re-rating could follow.

However, patience is key. Regulatory scrutiny, geopolitical tensions, and the capital intensity of AI infrastructure mean Alibaba's path to outperformance is not linear. Investors must weigh the potential for a 3–5 year re-rating against near-term risks like margin compression and competitive pressures from AWS and Microsoft.

Conclusion

Alibaba's AI-driven re-rating is not a certainty, but it is a plausible scenario for investors willing to tolerate volatility. The company's financial discipline, strategic AI bets, and undervalued multiples create a compelling risk-reward profile. While the road ahead is fraught with challenges, the potential for a valuation catch-up-should Alibaba execute its AI vision-makes it a stock worth watching for those with a contrarian mindset.