Alibaba's Valuation Reset: Why The 90% Rally Masks A Still-Untapped Growth Opportunity

In the past year, Alibaba Group (BABA) has surged nearly 90%, fueled by a rebound in e-commerce demand and optimism around its AI-driven cloud computing division. Yet, beneath the surface of this rally lies a compelling case for contrarian value investors: Alibaba's valuation remains disconnected from its long-term growth potential. With a price-to-earnings (P/E) ratio of 17.30 as of September 2025—well below its 10-year historical average of 31.76—and a PEG ratio of 0.16Alibaba Group Holding (BABA) PEG Ratio^[1], the stock appears to trade at a discount to its fundamentals. This disconnect, driven by short-term skepticism and macroeconomic noise, creates an opportunity to invest in a company with a durable competitive moat and untapped upside.

Valuation Metrics: A Discount to Growth

Alibaba's current P/E ratio of 17.30 is a stark contrast to its historical averages and industry peers. Over the past decade, its P/E has fluctuated wildly, peaking at 112.49 in 2022 during speculative fervor and hitting a trough of 12.09 in 2024 amid regulatory uncertaintyAlibaba PE Ratio 2011-2025 | BABA - Macrotrends^[2]. By September 2025, the metric had stabilized at 17.30, a 48% discount to its historical averageAlibaba PE Ratio 2011-2025 | BABA - Macrotrends^[2]. Meanwhile, the broader tech sector trades at a premium: the Semiconductors industry averages 45.63 P/E, while even slower-growing Auto Manufacturers trade at 8.14PE ratio by industry - FullRatio^[3].

The PEG ratio further underscores Alibaba's undervaluation. At 0.16, the stock is priced to deliver 112.86% earnings growth—a level that would make it one of the most attractively valued high-growth tech stocks in decadesAlibaba Group Holding (BABA) PEG Ratio^[1]. Analysts project Alibaba's net income to rise 68.7% to RMB 134.5 billion in FY2025Alibaba Group (BABA) Earnings Date and Reports 2025^[4], driven by cost discipline and gains from asset sales like Trendyol. Excluding these one-time boosts, core earnings growth remains robust, particularly in its cloud computing unit, which grew adjusted EBITA by 26% year-on-yearAlibaba PE Ratio 2011-2025 | BABA - Macrotrends^[2].

Growth Drivers: Cloud, AI, and Instant Commerce

Alibaba's cloud computing division is its most underappreciated asset. Generating 33.4 billion yuan in Q2 2025 revenue—a 26% YoY increase—the unit is now outpacing its e-commerce peers in growthAlibaba PE Ratio 2011-2025 | BABA - Macrotrends^[2]. The company's recent investment in a custom AI chip for cloud infrastructure signals a strategic pivot to monetize artificial intelligence, a market projected to grow exponentially over the next decadeAlibaba PE Ratio 2011-2025 | BABA - Macrotrends^[2].

Meanwhile, its instant commerce division—despite dragging on short-term earnings—represents a transformative opportunity. With 14.8 billion yuan in Q2 revenue and a projected 1 trillion yuan in incremental GMV over three yearsAlibaba PE Ratio 2011-2025 | BABA - Macrotrends^[2], this segment is poised to become a standalone growth engine. Alibaba's management has acknowledged the trade-off: heavy reinvestments in logistics and delivery networks have temporarily depressed e-commerce margins, but these expenditures are laying the groundwork for a dominant position in the $10 trillion global e-commerce marketAlibaba PE Ratio 2011-2025 | BABA - Macrotrends^[2].

Financial Health: Low Debt, Strong Cash Flow

Alibaba's balance sheet further supports a contrarian case. Its debt-to-equity ratio of 0.19 as of March 2025Alibaba Debt to Equity Ratio 2011-2025 | BABA | MacroTrends^[5] reflects minimal leverage, allowing the company to fund growth without diluting shareholders. While operating cash flow declined 10.9% year-on-year to $22.532 billionAlibaba Cash Flow from Operating Activities 2011-2025 | BABA^[6], this dip was driven by strategic investments in AI and instant commerce—capital expenditures that will compound into future profitability.

Critics argue that Alibaba's core e-commerce margins are under pressure, but this overlooks the company's broader ecosystem. The cloud division's 26% EBITA growthAlibaba PE Ratio 2011-2025 | BABA - Macrotrends^[2] and the instant commerce unit's 12% revenue increaseAlibaba PE Ratio 2011-2025 | BABA - Macrotrends^[2] demonstrate diversification into higher-margin, high-growth sectors. As the company shifts from a single-revenue model to a multi-pronged strategy, its earnings resilience will likely outpace skeptics' expectations.

Contrarian Rationale: Buying the Discount, Not the Noise

The market's skepticism toward Alibaba is rooted in short-term challenges: regulatory scrutiny, margin compression in e-commerce, and a crowded AI landscape. Yet, these risks are already priced into the stock. Alibaba's P/E of 17.30 and PEG of 0.16Alibaba Group Holding (BABA) PEG Ratio^[1] suggest investors are discounting its growth at a rate inconsistent with its fundamentals. For contrarian value investors, this represents a rare opportunity to buy a tech giant at a price that assumes no meaningful progress in its most promising ventures.

Analysts project Alibaba's revenue to grow 8.61% in FY2026, with earnings per share rising 20.61%Alibaba Group (BABA) Earnings Date and Reports 2025^[4]. If the company executes on its AI and cloud ambitions—areas where it has a first-mover advantage in China—the upside could be far greater. At current valuations, even a 50% earnings surprise would justify a P/E re-rating to 25, unlocking significant shareholder value.