What To Know Before Buying Alibaba Stock

Has Alibaba (NYSE: BABA) stock made its way back onto your radar? If so, you're not the only one. A regulatory crackdown beginning in the midst of the COVID-19 pandemic weighed this stock down all the way through the middle of 2024. There's a reason, however, shares have more than doubled since then, and are still moving higher.

Before stepping into this choppy recovery though, there are three things you might want to know.

1. It's still China's e-commerce leader

Alibaba's roots are in the e-commerce business. It launched Taobao in 2003 as a consumer-to-consumer sales platform, and then business-to-consumer marketplace Tmall in 2008. Both were quickly embraced too. Indeed, investment-management outfit DBS believes the combined sales of both sites collectively account for roughly 40% of China's entire e-commerce market.

And e-commerce is still a pretty big deal to Alibaba too. Although the company's added more businesses in the meantime like cloud computing services, logistics, digital video, as well as helping China's consumer-facing companies sell their goods overseas, e-commerce is still its single-biggest profit center, with Tmall and Taobao combining to generate nearly half of last quarter's top line of $18.6 billion.

2. Its top growth engine, however, is artificial intelligence

Alibaba may remain mostly an e-commerce outfit, but that could change soon enough. Its cloud intelligence unit that offers a range of artificial intelligence solutions saw 34% year over year revenue growth during the three-month stretch ending in September. Much of that growth stems from the increasing use of Alibaba's self-developed AI-powered chat-based tool called Qwen, which has proven surprisingly comparable to -- and competitive with -- platforms like OpenAI's ChatGPT and Google's Gemini.

Image source: Getty Images.

It's not just user interfaces, though. The company's also developing its own artificial intelligence hardware. In August, Alibaba unveiled an AI processor that performs comparably to industry-leading Nvidia's. This capability puts the organization in a good position to lead China's artificial intelligence market, which Morgan Stanley suggests could be worth $1.4 trillion by 2030.

3. Profit could be crimped for a while, but not because of AI

Finally, although Alibaba is in the right place at the right time with the right products, its recently released Q3 results serve as a warning to investors that its near-term bottom line could be disappointing. While total revenue was up 5% year over year, the bottom-line profit tumbled 85% because of heavy spending.

What's curious, however, is that spending on artificial intelligence isn't the culprit; its cloud intelligence business actually saw EBITDA improve to the tune of 35%. Rather, it's the well-established e-commerce unit that suffered a massive 76% decline in profitability resulting from heavy spending on its so-called "quick commerce" delivery initiative, and on its food-delivery operations in particular.

Although the investment should pay off in the long run, Morningstar analysts Chelsey Tam and Junhao Yang fear the underlying food-delivery price war could last until the end of 2027, crimping the company's net income throughout this period.

James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.