This AI Stock Is Up 50% in 2025. Is It Too Late to Buy?
The artificial intelligence (AI) euphoria-driven rally in U.S. stocks has more or less stalled and investors have been instead questioning Big Tech companies' burgeoning AI capex as we saw during Q4 earnings calls. However, there are signs of the AI rally moving to China ever since DeepSeek revealed that its AI model performed better than AI models from the likes of Meta Platforms (META) and OpenAI.
While China's prowess in manufacturing is well-known, DeepSeek claims to have developed its AI model at a fraction of the cost. Amid the rally in Chinese tech shares, Alibaba (BABA) stands out with its almost 50% year-to-date gain. In this article, we'll examine whether Alibaba is a buy or a sell now after the mammoth rally. But first, let's look at the factors that have driven BABA stock higher.
Why Is Alibaba Stock Going Up
To begin with, Chinese stocks are back on the radar of foreign investors amid hopes that the country's economic stimulus measures will help revive the world's second-largest economy. Markets expect the country to announce more stimulus measures as it prepares to hold the 'two sessions' – the Chinese People's Political Consultative Conference and the National People's Conference – in March.
Talking specifically of Alibaba, it has rallied amid the broad-based tech rally in China after the DeepSeek revelation. Alibaba announced that its Qwen 2.5-Max AI model performed better than not only DeepSeek-V3, but also OpenAI's GPT-4o, on several benchmarks.
Secondly, Apple (AAPL) has partnered with BABA which would help bring AI to iPhones in China. While the move would help Apple finally offer its flagship 'Apple Intelligence' in the world's second most populous country where it lost its position as the biggest smartphone company last year, it was also a testimony to Alibaba's AI prowess.
Finally, Chinese President Xi Jinping's meeting with Chinese entrepreneurs including Alibaba's co-founder Jack Ma further spurred the rally in BABA shares. Ma and Alibaba became the face of China's tech crackdown, so the meeting was quite an about-turn for the country's political leadership.
BABA to Release Its Earnings
Meanwhile, Alibaba is set to release earnings for its fiscal Q3 2025 on Feb. 20. Analysts expect the company's revenues to rise 7.4% year-over-year to $32.8 billion while its adjusted earnings per share (EPS) are expected to rise 2.8% in the quarter.
Analysts rate Alibaba as a 'Strong Buy' but the stock has run ahead of its mean target price of $120.47 during the recent rally. I would however expect brokerages to raise BABA's target price following its earnings.
Should You Buy or Sell Alibaba Stock?
Alibaba's valuations — or, for that matter, all Chinese tech stocks — took a beating after the country's tech crackdown in 2021. Making things worse was the structural slowdown in its economy, and U.S.-China trade tensions. Fast-forward to 2025, and while the trade war between the world's two largest economies might worsen before they eventually reach some sort of deal, China has been addressing the other two issues.
The stimulus is expected to support the Chinese economy and by meeting private entrepreneurs, the Chinese president has signaled that the crackdown on private tech companies is now in the rearview. Alibaba has seen a valuation rerating and now trades at just about 14x its expected earnings over the next 12 months. While that multiple is still below what U.S.-based peers like Amazon (AMZN) trade at, it is significantly higher than the single-digit multiples that BABA traded at last year.
I believe the valuation disconnect between U.S. and Chinese tech companies is here to stay. First, China faces structural issues like high debt and an aging economy. Second, tensions between China and the Western world look here to stay, which could deter many investors from considering Chinese stocks.
Overall, while BABA's valuations still don't look demanding, I took some profits off the table here. I would however be willing to add to my position if the stock comes off these levels as I believe that BABA is a long-term business restructuring story as it tries to unlock value by listing its different business segments.
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