Alibaba's Share Price Surge Amid Diminished Bank Targets: A Mispricing Opportunity?

Alibaba Group (BABA) has experienced a notable share price surge in late 2025, despite a backdrop of mixed financial performance and analyst downgrades. This divergence raises a critical question: Is Alibaba's current valuation a mispricing opportunity, or does it reflect a market overestimating the company's long-term potential? By analyzing Alibaba's valuation dislocation, strategic investments, and institutional sentiment, this article argues that the stock's undervaluation relative to its growth trajectory in cloud computing and AI presents a compelling case for long-term investors.

Valuation Dislocation: A Tale of Two Metrics

Alibaba's forward price-to-sales (P/S) ratio of 2.28 exceeds the Zacks Internet-Commerce industry average of 2.1, yet its price-to-earnings (P/E) ratio of 19.57 as of January 2026 is 37% below its 10-year historical average of 32.3. This dislocation reflects a market that remains skeptical of Alibaba's near-term profitability but acknowledges its structural growth in high-margin segments. For context, Alibaba's P/E is lower than Amazon's 34.16 and Mercadolibre's 53.37 but higher than eBay's 19.42. This positioning suggests Alibaba is undervalued relative to global e-commerce peers, particularly given its dominant 35.8% share of China's AI cloud market.

The company's margin compression-operating margins fell from 15% to 2% in 2023–2025-stems from strategic investments in AI infrastructure and quick commerce, which have consumed RMB 120 billion in capital expenditures over four quarters. While these investments have depressed short-term earnings, they are laying the groundwork for long-term revenue diversification. For instance, Alibaba Cloud's 34% year-over-year revenue growth in Q3 2025 was driven by AI-related workloads, which generate higher revenue per customer.

Long-Term Growth: Cloud and AI as Catalysts

Alibaba's pivot to cloud computing and AI is reshaping its business model. The company has committed RMB 380 billion ($53 billion) over three years to expand its cloud and AI infrastructure, with a focus on global markets. This investment has already yielded results: Alibaba Cloud's AI models, such as Qwen, have spurred the creation of over 180,000 derivative models on HuggingFace, signaling strong developer adoption. Analysts project cloud revenue growth to accelerate to 30% annually in the coming quarters, driven by demand from industries like automotive and education.

The e-commerce segment, while stabilizing, remains a mixed bag. Customer management revenue (CMR) grew 10% in H1 2026, but EBITA margins in the Alibaba China E-commerce Group fell to 7.9% in Q2 2026. This margin pressure is strategic, as the company prioritizes market share in quick commerce and logistics, where it has invested heavily to counter competition from Pinduoduo and JD.com. While these initiatives may delay profitability, they align with Alibaba's broader goal of becoming a "digital infrastructure provider" for global enterprises.

Institutional Sentiment and Analyst Price Targets

Institutional investor sentiment has turned cautiously optimistic. Cathie Wood's ARK Invest re-entered Alibaba in late 2025, purchasing $41.3 million worth of shares, while Axiom Investors LLC and Brighton Jones LLC increased their stakes in Q4 2025. Analyst price targets for December 2025 ranged from $124.82 to $258.45, with an average of $195.25-37% above the stock's closing price of $154.47. This premium suggests that analysts expect Alibaba's cloud and AI investments to translate into earnings growth by 2026, even as near-term margin pressures persist.

However, not all analysts are bullish. A downgrade from Freedom Capital Markets highlighted risks in the core retail segment, including slower growth and rising technology costs. These concerns underscore the importance of monitoring Alibaba's ability to balance short-term capital allocation with long-term innovation.

Conclusion: A Mispricing Opportunity?

Alibaba's valuation dislocation reflects a market that underestimates the company's long-term potential in cloud and AI while overemphasizing near-term margin challenges. With a P/E ratio below its historical average and a forward P/S ratio that aligns with its growth trajectory, Alibaba appears undervalued relative to its peers. The company's strategic investments, though costly, are positioning it to capitalize on China's digital transformation and global AI demand. For investors with a multi-year horizon, Alibaba's current valuation offers a compelling entry point-provided the company can execute its cloud and AI roadmap without sacrificing long-term profitability.