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AI Is a Bigger Tailwind for Alibaba Stock Than You Might Think

As AI takes off in China, so will Alibaba stock

Alibaba Group (NYSE:BABA) often is vaunted for its Amazon-like qualities when it comes to products, but not much has been made about the effect artificial intelligence could have on Alibaba stock.

AI Is a Bigger Tailwind for Alibaba Stock Than You Might Think
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When it comes to AI much of the buzz is about US companies. Then again, mega operators like Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) have invested billions in the technology.

Alibaba Stock, AI and China

But often left out is what’s happening in China. Interestingly enough, the opportunity in this country may be even bigger. A recent book from Dr. Kai-Fu Lee, AI Superpowers: China, Silicon Valley, and the New World Order, provides compelling arguments why China has what it takes to be a dominant AI power (keep in mind that he has worked at companies like Google and Microsoft).

He points out advantages like a massive population, the fewer regulations on personal data collection and the heavy investments from private companies and the government.

So for investors, where are the opportunities? What companies look interesting?  Well, a good place to start is. After all, it has substantial profits, which allow the company to hire top talent in the AI world.

For example, the company recently hired two top AI experts: Chen Ying from Nokia (NYSE:NOK) and Tan Ping, who was a professor of computer science at Canada’s Simon Fraser University.

But of course, with BABA stock, there is the benefit of enormous amounts of data. Note that the company’s marketplaces, which include Taobao and Tmall, have 674 million annual active consumers as well as 755 million mobile MAUs (Monthly Active Users). By using AI, BABA has been able to realize more efficiencies but also allow for better planning and support.

The Cloud and Chips

But the technology has also been essential in efforts in expanding into brick-and-mortar retailing. To this end, BABA has developed a next-generation store, called Hema Fresh, which leverages AI for managing inventories and the supply chain. And yes, facial recognition provides for payments.

Then there is BABA’s digital assistant, called Alime, which is similar to Alexa. It currently has roughly 50 million daily active users and has been able to handle more than 83,000 users per minute.

BABA’s cloud business has certainly proven to be critical for the AI strategy. The platform has a full-blown suite of features for computer vision, machine learning, deep learning and NLP (Natural Language Processing).

As with the case of AMZN, the cloud business is likely to be a big-time driver for Alibaba stock for the long haul and AI will play a big role. In the latest quarter, the unit reported a 66% jump in revenues to $1.1 billion.

In the meantime, BABA continues to push the boundaries of innovation with AI.  Consider its development of the Hanguang 800 inference chip. It allows for high-performance processing of neural networks.

To get a sense of its power, the chip is able to upload one billion product images in about five minutes, versus one hour using older technologies. While the chip is currently for internal purposes, this is likely to change. That is, the Hanguang 800 could turn into a nice source of revenues.

Bottom Line on Alibaba Stock

The recent developments with the US-Trade situation are encouraging for Alibaba stock, but even if things fall apart, the fact remains that the secular growth trends in China still look bright.  The middle class continues to increase in number, which will mean more demand for eCommerce and the cloud.

What’s more, BABA is positioned nicely to take an outsized share of the opportunity.

The valuation is also fairly attractive. Note that the forward price-to-earnings ratio is at roughly 20X, which is quite reasonable given robust growth on the top line. So all in all, BABA stock looks like a pretty good bet right now for investors.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/ai-tailwind-alibaba-stock/.

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