Alibaba Stock Is Picking Up Steam: Is It Overdue for a Big Rally?

Many tech stocks have been soaring in recent years due to enhanced growth opportunities relating to artificial intelligence (AI). But while investors have been fairly bullish on tech as a whole, they've remained cautious when it comes to geopolitical uncertainty, which is at least part of the reason why Chinese-based Alibaba Group Holdings (NYSE: BABA) hasn't generated strong returns. In five years, it has lost close to half of its value.

Recently, however, it's been showing some signs of life. In the past few weeks, as investors have been moving out of high-priced tech stocks, Alibaba's stock has been rallying. On Monday, it closed at just over $112, up about 17% from the roughly $96 it was trading at just a few weeks earlier, toward the end of June.

Given its beaten-down valuation and investors potentially rotating out of high-priced stocks into more reasonably priced options, could this be the beginning of a much larger rally for Alibaba?

Image source: Getty Images.

Alibaba's growth rate has been improving, and AI may lead to more opportunities

In recent quarters, Alibaba has been experiencing stronger growth, and it has been investing heavily in AI. Its Qwen AI app topped 100 million monthly active users this year, and Alibaba has also launched enterprise AI agents as it hopes to take advantage of more emerging opportunities in AI.

As a leading tech company in one of the largest markets in the world, Alibaba is well-positioned to grow. Investors, however, may feel a bit underwhelmed with its growth because while it has been improving, it remains in single digits.

BABA Revenue (Quarterly YoY Growth) data by YCharts

Is Alibaba's stock a good option for AI investors today?

At 17 times its trailing earnings, Alibaba's stock looks undervalued when you consider the average stock on the S&P 500 trades at a multiple of 26. But there is some risk here that investors should consider, because while it does have opportunities and its valuation may appear low, that doesn't mean it's a no-brainer buy.

While Alibaba has tremendous potential, its results fail to truly show it effectively capitalizing on its opportunities. Plus, its earnings have been inflated recently by changes in equity investments and other items. The company's adjusted earnings were nearly completely wiped out during the first three months of the year, as Alibaba attributed its evaporating profits to significant investments in tech and quick commerce.

All in all, while Alibaba's stock is rallying of late, it may not exactly be an underrated buy right now. It does have some compelling growth opportunities, but I wouldn't rush to buy it as its financial results simply haven't been all that impressive.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.