Why Shares of Alibaba Are Rising Today

Key Points

• Alibaba is one of China's largest tech and artificial intelligence companies.

• Its cloud business has been performing well, driven by new AI products.

• Alibaba has also launched quick-service delivery.

• 10 stocks we like better than Alibaba Group ›

Shares of Chinese tech giant Alibaba (NYSE: BABA) were trading more than 3% higher as of 12:26 p.m. ET Monday after a Wall Street analyst issued a new research note on the company and raised his price target on the stock.

Cloud to accelerate

In his note, Barclays analyst Jiong Shao maintained his overweight rating on Alibaba and hiked his price target by $45 to $190 per share, implying about 36% upside from current levels.

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Shao's thesis is built on continuing strength in Alibaba's cloud business, which not only houses traditional cloud services like data storage, but also new artificial intelligence capabilities that have seen triple-digit percentage revenue growth for eight straight quarters. Shao also thinks that the losses being generated by Alibaba's new rapid-delivery business will soon abate.

"We expect cloud revenue growth to continue to accelerate from 26% year-over-year in [the] June-quarter in coming quarters with stable margins," Shao said in his note. "With respect to the price war in food delivery and BABA's significant losses in instant commerce, our conviction has been that the significant losses are transitory and losses will likely peak in Sep.-Q. We expect BABA to run its instant commerce business at around break-even in a steady state, while extracting meaningful synergy to benefit its core e-commerce franchise."

Buying big tech and AI in China is different

Alibaba trades at less than 18 times forward earnings, which is a much friendlier valuation than some of the tech and AI giants in the U.S. trade at now. This is fairly standard, however, because there are greater risks of government intervention in the public markets in China, making the regulatory environment less predictable. The Chinese economy has also struggled immensely in recent years.

That said, if you do your due diligence on these factors and still feel comfortable with investing in this Chinese stock, Alibaba offers investors exposure to a tech and AI company with significant scale in a massive market, and at a better valuation than you could get for a similar U.S.-based company.

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