Alibaba: Balancing AI Growth and Profitability – Is the Stock a Buy or Sell?

In the ever-evolving landscape of global technology, Alibaba Group stands at a crossroads. The Chinese e-commerce and cloud computing giant has long been a bellwether for innovation in Asia, but its recent strategic pivot toward artificial intelligence (AI) has sparked a critical debate: Is Alibaba's stock undervalued in the face of aggressive long-term investments, or is it overexposed to the risks of prioritizing growth over profitability?

The Financials: Growth vs. Erosion of Margins

Alibaba's fiscal second-quarter results underscored a mixed reality. Total revenue hit 247.8 billion yuan, exceeding estimates, with cloud computing emerging as a standout performer. The division reported a 34% year-on-year revenue increase to 39.8 billion yuan, driven by triple-digit growth in AI-related products. This momentum aligns with CEO Eddie Wu's public commitment to "aggressively expand AI capabilities and infrastructure," part of a three-year, 380 billion yuan investment plan.

Yet, profitability has taken a hit. Adjusted EBITA plummeted 77% year-on-year to 9.1 billion yuan, a decline attributed to heavy spending on quick commerce, food delivery, and R&D. R&D expenses rose 26% year-on-year, reflecting the company's bet on AI innovation. While such investments are critical for long-term competitiveness, they raise questions about short-term shareholder returns.

The AI Bet: A Strategic Moonshot

Alibaba's 380 billion yuan AI and cloud infrastructure plan-equivalent to $52.4–53 billion-is one of the largest private-sector computing projects in China. This investment not only dwarfs the company's prior decade of AI spending but also signals a strategic shift toward an AI-driven growth model. Wu has framed AI as a "once-in-a-generation" opportunity, with ambitions extending to Artificial General Intelligence (AGI).

The rationale is clear: Alibaba Cloud's recent triple-digit AI product revenue growth highlights surging demand for AI services, particularly in enterprise and consumer applications. Analysts project that Alibaba Cloud's revenue could double by 2028, positioning the company to capture a larger share of the global AI cloud market. However, this optimism hinges on execution. The path to AGI remains speculative, and the upfront costs could strain profitability for years.

Valuation Realism: A Discounted Opportunity

Alibaba's current valuation appears to reflect a disconnect between its strategic ambitions and market perception. As of September 2025, the stock trades at a P/E ratio of 16.9x to 17.14x, significantly below the industry average of 19.5x and the peer average of 39.2x. Analysts estimate a fair P/E of 27.2x, suggesting the stock is undervalued relative to its fundamentals.

Market capitalization data reinforces this view. Alibaba's valuation stands at $404.87 billion, yet the current share price lags 33% below the average price target of $151.78. With 21 analysts issuing "Buy" or "Strong Buy" ratings in the past month, the consensus remains bullish. Notably, Citi raised its price target to $225.00, while J.P. Morgan and Jefferies set a high of $230.00, reflecting confidence in Alibaba's AI-driven transformation.

The Risks and Rewards of a Long-Term Play

The central tension for investors lies in Alibaba's balancing act: Can it sustain AI-driven growth while mitigating the drag on profitability? The company's heavy spending has already led to a 77% drop in adjusted EBITA, and R&D costs are expected to rise further. Regulatory headwinds in China and global macroeconomic pressures add layers of complexity.

However, the long-term potential is undeniable. Alibaba Cloud's projected revenue doubling by 2028 and the broader AI infrastructure investment position the company to benefit from a secular shift in technology. For patient investors, the current valuation discount-coupled with a 27% average upside from analyst price targets-presents an attractive entry point.

Conclusion: A Buy for the Patient Investor

Alibaba's stock is a classic case of undervaluation amid strategic reinvention. While near-term profitability concerns are valid, the company's AI and cloud investments are poised to unlock significant value over the next five years. The current P/E ratio and analyst optimism suggest the market has not fully priced in Alibaba's long-term potential. For investors with a multi-year horizon, this appears to be a compelling buy.