The Chinese Tech Stock That Trades at a Discount and Is Poised to Rally 70%

Over the past few years, many American tech stocks skyrocketed to fresh record highs as the artificial intelligence (AI) market expanded. However, that secular boom also increased the weight of AI-driven tech stocks in the S&P 500 and stretched the benchmark index's valuations.

At 30 times earnings, the S&P 500 is trading far above its average price-to-earnings ratio of 20 over the past two decades. Therefore, investors shouldn't be too surprised if the market's bubblier tech stocks fizzle out and the market retreats to more sustainable levels.

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So instead of chasing the top U.S. tech stocks today, investors might want to pivot back toward the Chinese tech sector's unloved and undervalued stocks. Many of those companies are still growing and have wide moats, but their valuations are being compressed by the ongoing trade war between the U.S. and China.

One of those stocks is Alibaba (NYSE: BABA), China's top e-commerce and cloud infrastructure company. Alibaba's stock has already rallied about 80% this year, but it still trades about 50% below its all-time high and looks like a bargain at 18 times next year's earnings. Let's see why this stock could soar more than 70% over the next 12 months.

What happened to Alibaba over the past four years?

Alibaba was once considered a straightforward play on the rapid growth of China's e-commerce and cloud infrastructure markets. Its Taobao and Tmall marketplaces dominated online shopping as its Alibaba Cloud platform locked in big companies.

But in 2021, China's antitrust regulators cracked down on its e-commerce businesses. They hit it with a record $2.8 billion fine and barred it from locking in merchants with exclusive deals, using loss-leading promotions to gain new customers, and expanding its business with unapproved investments and acquisitions. Those tighter restrictions eroded its defenses against other e-commerce platforms, including PDD (NASDAQ: PDD) and JD.com (NASDAQ: JD).

To make matters worse, that crackdown coincided with China's post-pandemic economic slowdown, which was further exacerbated by its draconian "zero COVID" lockdowns. That pressure also drove many companies to rein in their spending on Alibaba's cloud infrastructure services.

In fiscal 2022 (which ended in March 2022), Alibaba's revenue still rose 19%. But in fiscal 2023, its revenue grew just 2% as its core e-commerce and cloud engines stalled out. That slowdown convinced many investors that Alibaba's high-growth days were over.

Yet Alibaba's revenue rose 8% in fiscal 2024 and 6% in fiscal 2025 as its business gradually stabilized. To offset the sluggish growth of its Chinese e-commerce marketplaces, it expanded its higher-growth overseas marketplaces -- which include Lazada in Southeast Asia, Trendyol in Turkey, Daraz in South Asia, and AliExpress for its cross-border purchases. It also opened up its Cainiao logistics services to more external customers. Meanwhile, its cloud business recovered as more companies ramped up their spending on AI applications, and Alibaba integrated its own Qwen large language models into its cloud platform to support those newer AI services.

Why could Alibaba's stock rally more than 70%?

From fiscal 2025 to fiscal 2028, analysts expect Alibaba's revenue and earnings per share (EPS) to grow at a compound annual growth rate of 8% and 12%, respectively. That stable growth will probably be driven by its overseas e-commerce marketplaces, Cainiao, and Alibaba Cloud.

Assuming Alibaba still trades at 18 times forward earnings by the end of fiscal 2027 (March 2027) and the exchange rates remain stable, its stock could rise about 25%. But if it trades at a more generous 25 times forward earnings by then, its stock could rally roughly 73%.

We should take those estimates with a grain of salt, but Alibaba could easily command a higher valuation if the trade tensions between the U.S. and China finally ease. If that happens, Alibaba could outperform many of the top tech stocks in the U.S. over the next year.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group and JD.com. The Motley Fool has a disclosure policy.