When it comes to AI, the buzz is often about the opportunity in the U.S. market. But this really too narrow. Keep in mind that China is already a major force in AI. And yes, a great way to play this is with Alibaba (NYSE:BABA) stock.
First of all, let’s see some of the advantages of China. Actually, a book from Kai-Fu Lee, called AI Superpowers: China, Silicon Valley, and the New World Order, highlights the main ones. He is top innovator in the AI space, having received his Ph.D. in computer science at Carnegie Mellon University, and worked at companies like Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG).
In his book, Lee states that China is on its way to dominate the AI market. One reason is that the government has been committed to invest in the industry, along with many home-grown venture capital firms. Next, because of companies like BABA, Tencent (OTCMKTS:TCEHY), Baidu (NASDAQ:BIDU) and JD.com (NASDAQ:JD), there is an enormous amount of data. For example, most people use their smartphones for their everyday purchases (which, of course, is in stark contrast to the U.S.). It also helps that the Chinese government is fairly permissive when it comes to privacy requirements.
Finally, the country has a strong educational system, which means the graduation of large numbers of talented engineers.
Alibaba and AI
Note that Alibaba stock has already benefited from AI. The technology has been able to scale its massive e-commerce marketplace, ad systems and logistical infrastructure. Then again, the company has the benefit of having platforms that generate large data sets. Consider that it’s retail marketplaces have 824 million mobile monthly active users (MAUs).
“On the 2019 Singles Day, the Alime Shop Assistant handled 97% of online customer inquiries on Taobao and Tmall,” said Nir Kshetri, a business professor at the University of North Carolina at Greensboro. “Its AI-enabled smart speaker Tmall Genie is also becoming popular. Over 1 million orders were processed using it on Singles Day.”
Consider that Alibaba’s AI efforts are not just about software and data either. The company has also been investing aggressively in chips. It’s new Hanguang 800 demonstrated significant improvement in compute power. What may have taken an hour to process will take only about five minutes or so. The chip is currently for internal purpose but could ultimately be commercialized.
Alibaba has been prolific with its venture investments in AI startups as well. One of its deals was for Megvii Technology, a security operator. Revenues tripled to $133 million, primarily because of AI solutions. Megvii intends to raise $1 billion from an IPO on the Hong Kong exchange.
Alibaba Stock and the Cloud
But when it comes to AI and Alibaba stock, the cloud may represent the most important driver. The company is essentially using the Amazon (NASDAQ:AMZN) playbook that created the $40 billion AWS business.
Last month Alibaba announced that it would invest a whopping $28 billion in its cloud business (for the next three years). Sure, a big part of this will be the infrastructure. But the cloud platform will be a powerful way to monetize its AI assets, such as for video/speech recognition, neural network modeling, workflows, AutoML and so on.
According to Wedbush Securities analyst Daniel Ives:
“We note while Alibaba has seen strong growth on cloud over the past year (60%+ growth), this business represents less than 10% of overall revenues and we believe could double over the next few years as the China cloud story continues to ramp significantly. With Amazon and Microsoft in a global two-horse race owning the cloud market, Alibaba is making both an offensive and defensive move with today’s cloud announcement in our opinion.”
The Bottom Line On Alibaba Stock
The novel coronavirus will likely weigh on the results for Alibaba – at least in the near- term. Although, it does look like China has been recovering. But the secular move to the cloud, AI and e-commerce should provide for durable long-term growth. And the valuation for Alibaba stock is fairly reasonable, with the forward price-earnings at only about 24, and the high levels of free cash flows will allow the company to keep up the aggressive investments in M&A and R&D.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.