Why Shares of Alibaba Soared 27.4% In July

Shares of Alibaba (NYSE: BABA) rose 27.4% in July, according to data from S&P Global Market Intelligence. The technology giant in China did not report earnings last month, but investors enjoyed a massive turnaround in its share price due to growing demand for its cloud computing services and the success of artificial intelligence (AI) models emerging from the country.

As of the close on August 6, Alibaba shares are down around 19% this year. Here's why it rose in July and whether it is a buy right now.

Stellar cloud and AI growth

Like its peer from the United States, Alibaba is known for its e-commerce platform, and has pivoted to the fast-growing cloud computing market with great success. It is the leading cloud provider by market share in the Asia Pacific region, with revenue growing 38% year-over-year to $6 billion last quarter.

Now, there has been a resurgence of AI models from Chinese companies that cost less to run than those from competitors, at least on average. This happened in early July and spurred Chinese technology stocks, such as Alibaba, to rise. At the same time, Alibaba itself operates one of these models, Qwen, which is becoming an increasingly popular option for companies worldwide.

These two factors -- potential increases in cloud demand and the growth of Qwen -- have helped Alibaba stock recover in July.

Image source: Getty Images.

Should you buy Alibaba stock?

There is no doubting that Alibaba's cloud business is growing, and quickly. However, its legacy e-commerce and retail business is growing only 6% year-over-year due to intense competition in China and low consumer spending in the years after the country's massive property bubble burst. With Alibaba's "other" revenue segment seeing a sharp decline, consolidated sales only grew 3% year-over-year last quarter.

This growth rate may improve this quarter and in the years ahead if Alibaba maintains its leadership position in cloud computing in Asia, along with the growth of its own AI models.

Today, Alibaba stock trades at a price-to-earnings ratio (P/E) of 20, which is lower than some of its big tech competition from the United States. Management is also repurchasing a lot of stock, bringing shares outstanding down 8.5% in the last three years.

Still, investors should be concerned about the e-commerce business and, as foreign investors, about putting money in China. This is a country that is hard to understand as a foreigner, with a government that can change a sector's profitability at will (as happened to big tech companies like Alibaba a few years ago). This should keep you cautious about buying Alibaba stock after last month's rise.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.