Is Alibaba Still a Buy After Its Explosive Rally?

Alibaba’s stock has been on a tear, surging nearly 50% over the past four weeks in a rally fueled by growing optimism over its AI ambitions, government stimulus, and a potential game-changing partnership with Apple. Technically, the stock looks overextended, with its Relative Strength Index (RSI) hitting 81, a level that typically signals overbought conditions and raises the possibility of a near-term pullback. However, a closer look at Alibaba’s valuation suggests that there could still be significant upside ahead, even after this explosive move.

The reported Apple partnership, which would see Alibaba’s AI integrated into new iPhones in China, marks a major strategic win for the company, reinforcing its growing influence in the AI space. With earnings on the horizon, a short-term shakeout could provide a compelling entry point for investors, though a deeper dive into the fundamentals suggests that waiting for a dip may not even be necessary.

The Apple Rumor

Apple and Alibaba’s reported partnership to bring AI-powered features to iPhones in China could be a pivotal moment for both companies (Note: BABA co-founder Joe Tsai confirmed the partnership at the World Government Summit in Dubai today). Apple Intelligence, the company’s proprietary AI suite, has yet to launch in China due to regulatory hurdles and the need for a local AI partner. A report from The Information suggests that Apple and Alibaba have co-developed AI tools and submitted them for approval by China's cyberspace regulator, signaling a potential breakthrough. Apple had previously explored partnerships with Baidu, Tencent, ByteDance, and DeepSeek but ultimately selected Alibaba due to its extensive data resources and AI expertise. If approved, this collaboration would allow Apple to introduce advanced AI functionalities in China, a crucial market where it has been losing ground to domestic competitors like Huawei. For Apple, gaining a foothold in the Chinese AI ecosystem is essential, as CEO Tim Cook has emphasized that iPhone upgrades are stronger in regions where Apple Intelligence is available.

For Alibaba, the potential deal would be a major validation of its AI capabilities, setting it apart from rivals in China’s highly competitive AI sector. The company has been aggressively expanding its AI portfolio, recently launching its Qwen2.5-VL AI model, which competes with OpenAI’s GPT models. Integrating its AI into Apple’s iPhone ecosystem would not only enhance its credibility as a global AI leader but also solidify its relationship with Chinese regulators, demonstrating that its AI models meet government standards for large-scale consumer applications. Moreover, Alibaba’s cloud division, already China’s largest, stands to benefit from the increased AI demand that a partnership with Apple could generate. With AI becoming an increasingly critical component of consumer and enterprise technology, Alibaba’s positioning in this space could provide a significant long-term growth catalyst.

Alibaba’s AI ambitions extend beyond just a potential Apple partnership. The company’s latest Qwen2.5-VL model has received praise for its advanced capabilities, including text and image analysis, video parsing, and automation tasks. These improvements come at a time when Chinese AI companies are gaining traction, particularly after DeepSeek’s recent announcement that its AI model could match OpenAI’s performance at a fraction of the cost. DeepSeek’s claims rattled the broader AI market, leading to sharp declines in Microsoft and Nvidia shares. However, Alibaba emerged as a winner from the fallout, with its stock rallying as investors recognized its growing AI capabilities. Unlike DeepSeek, which remains an emerging player, Alibaba has the scale and infrastructure to deploy AI across its vast ecosystem, integrating it into e-commerce, cloud computing, and enterprise solutions.

Alibaba is reportedly planning to slash prices on its Qwen-VL large language model (LLM) by up to 85%, signaling an aggressive push to cut AI costs and gain market share in an increasingly competitive landscape. The move comes as AI-driven cloud services have become a key growth driver for Alibaba, with its Cloud segment posting a 7% revenue increase in Q3, accelerating from previous quarters. While the price reduction may pressure short-term revenues, it reflects Alibaba’s strategy to dominate the AI infrastructure market by making its LLMs more accessible. This decision comes amid rising competition from Chinese tech giants like Baidu and Tencent, both of which are heavily investing in AI innovation. Alibaba remains confident that its Cloud division will return to double-digit growth over the medium to long term, with aggressive pricing seen as a necessary step to cement its leadership in AI-driven cloud services.

Despite Alibaba’s recent AI momentum, challenges remain. Regulatory scrutiny in China and ongoing U.S.-China trade tensions could impact its ability to scale its AI ambitions, particularly in securing the necessary computing resources. Additionally, competition is intensifying, with Baidu preparing to launch its Ernie 5 model and ByteDance continuing to expand its AI-driven services. However, Alibaba’s ability to rapidly innovate and leverage its vast data resources provides a key competitive advantage. If the Apple partnership materializes, it would not only boost iPhone sales in China but also elevate Alibaba’s status as a leading AI provider. As the AI race accelerates, Alibaba’s latest advancements position it as a formidable force in the industry, with the potential to drive long-term growth across multiple business segments.

Alibaba Earnings on Tap

Alibaba is set to report its fiscal third-quarter results on February 20 before the market opens, with the backdrop of its rumored AI partnership with Apple likely to weigh heavily on investor sentiment and be a backdrop during Q&A (although BABA may not offer much in the way of details). The potential collaboration, if confirmed, could significantly bolster Alibaba’s AI credentials and provide a new avenue for growth beyond its core e-commerce and cloud businesses. However, the earnings report itself will primarily focus on whether Alibaba can sustain its recent momentum in cloud and AI-driven revenue while addressing the persistent headwinds facing its core domestic e-commerce operations. Analysts expect Q3 earnings per share of $2.84, implying 7% sequential growth, while revenue growth will be closely watched, particularly in light of China’s sluggish macroeconomic environment.

In Q2, Alibaba reported mixed results as its overall revenue grew just 5% year-over-year, slightly missing expectations. The company’s core e-commerce segment, which includes Taobao and Tmall, remained under pressure, posting only 1% growth after struggling with government-imposed restructuring, increased competition from JD.com (JD) and Pinduoduo (PDD), and weak consumer spending. While Alibaba remains optimistic that China’s potential stimulus measures could revive consumer demand, the near-term outlook for its domestic e-commerce platforms remains uncertain. This raises the question of whether Alibaba’s ongoing adjustments—such as shifting merchant fees to a percentage-based model—will be enough to reinvigorate growth.

One bright spot in Q2 was Alibaba’s Cloud business, which posted 7% revenue growth, largely fueled by AI-driven products that saw triple-digit growth for the fifth consecutive quarter. The cloud division, which accounts for about 10% of Alibaba’s total revenue, remains a key long-term growth driver, especially as the company continues to roll out AI innovations such as its Qwen AI models and Quanzhantui marketing tools. Additionally, Alibaba’s international business was another strong performer, with revenue surging 29% year-over-year, driven by continued expansion in AliExpress' Choice business, particularly in Europe and the Gulf regions. The question heading into Q3 earnings is whether these higher-growth segments can continue to offset the challenges in Alibaba’s core domestic business.

Can BABA Shares Continue to Rally

Alibaba’s recent rally, surging nearly 50% in just four weeks, has reignited investor enthusiasm, yet the stock still appears reasonably valued relative to both its historical metrics and global peers. With a current P/E ratio of 20.2x, Alibaba remains below its long-term average of 29.4x, suggesting there could be further room to run if the company successfully capitalizes on AI integration within its e-commerce and cloud divisions. While its valuation exceeds that of local competitor JD.com, which trades at a P/E of 12.8x, it remains significantly cheaper than Amazon, which carries a multiple of 50.8x. If Alibaba’s revenue trajectory improves with AI-driven enhancements and Chinese government stimulus translates into stronger domestic consumer spending, a return to its historical median valuation could push the stock toward a P/E of 30 or higher, supporting further price appreciation.

Analysts see a base-case scenario where BABA trades at a P/E of 15x, implying a price target of around $143 per share, while a more bullish projection based on 12-month forward EPS of $9.56 suggests a potential climb to $190. The stock’s strong run has come despite geopolitical uncertainties, including tariff threats from the Trump administration, as investors focus on its AI advancements and potential resurgence in Chinese consumer demand. High-profile hedge fund managers like David Tepper have taken notice, with Alibaba representing his largest holding, even after trimming his position in Q3. If the company continues executing on its AI strategy and macroeconomic conditions stabilize, Alibaba’s valuation suggests it may still have substantial upside.

Should You Buy Alibaba Now?

Alibaba’s remarkable 50% surge over the past month has reignited interest in the stock, but the key question remains: can the rally continue? While short-term technical indicators suggest the stock is overbought, its underlying fundamentals and valuation indicate that further upside remains possible. The company’s aggressive push into AI, particularly through its cloud division and a potential Apple partnership, positions it as a major player in the evolving AI landscape. Additionally, the prospect of Chinese government stimulus reaching consumers could provide a much-needed boost to its e-commerce business, which has struggled in recent quarters. At the same time, tariff concerns and ongoing U.S.-China tensions remain a potential overhang, but if Alibaba can continue diversifying its revenue streams and leveraging AI-driven growth, these risks may be mitigated.

For investors, the upcoming earnings report on February 20 will be a crucial moment to assess Alibaba’s trajectory. A short-term pullback around earnings could present a compelling buying opportunity, particularly if the stock retraces toward key support levels. However, given the company’s current valuation, long-term investors may not need to wait for a dip to initiate a position. With its cloud and AI businesses showing strong momentum, and the potential Apple partnership serving as a significant catalyst, Alibaba is positioning itself for sustained growth. The stock may still have room to run, and those who believe in its long-term AI potential might find it prudent to start accumulating shares now, while remaining mindful of any macroeconomic or geopolitical developments that could impact sentiment.