Why Alibaba Rallied Today

Key Points

• Alibaba reported strong revenue growth and accelerating cloud growth.

• Artificial intelligence (AI) is center stage now, and AI-related revenues grew triple digits.

• However, profits actually decreased amid the brutally competitive Chinese e-commerce industry.

• 10 stocks we like better than Alibaba Group ›

Shares of Chinese e-commerce and tech giant Alibaba (NYSE: BABA) rallied on Friday, appreciating 13.1% as of 2:28 p.m. ET.

Alibaba reported earnings today, which appeared to encourage investors. While profits actually went down, an acceleration of cloud and artificial intelligence (AI) revenue appear to be the most important data points.

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In addition, the Wall Street Journal reported the Chinese tech giant has developed a new AI chip, which could take on importance since China recently issued an order discouraging the use of Nvidia's (NASDAQ: NVDA) H20.

Alibaba is becoming a top Chinese AI company

In its fiscal first quarter, Alibaba grew revenue just 2%, but revenue grew 10% outside of divestitures, which included the Sun Art and Intime businesses. Within that 10%, Alibaba's domestic e-commerce revenue grew 10%, international e-commerce grew 19%, and the cloud intelligence group accelerated to a 26% growth rate.

On the negative side, profits actually decreased, with adjusted non-GAAP (generally accepted accounting principles) earnings before interest, taxes, depreciation, and amortization (EBITDA) falling 11%. The company put big investments behind its Taobao Instant Commerce initiative, which aims to deliver packages within an hour, as well as associated marketing efforts. An overwhelming majority of Alibaba's business is still in a brutally competitive Chinese e-commerce industry, and at least in this quarter, we saw that competition in the form of lower margins.

Yet it appears the cloud revenue acceleration was exciting enough, especially as management noted that AI-related cloud revenue grew at a triple-digit rate for the eighth consecutive quarter.

AI enthusiasm may have also been sparked by today's Wall Street Journal article highlighting Alibaba's new chipmaking efforts. Alibaba's prior efforts in this area had focused on application-specific chips, but the WSJ reported Alibaba's newest chip can achieve a broader range of AI inference tasks. Also embedded in the WSJ article is the fact that. unlike Huawei's AI chip, Alibaba's new chip will be software-compatible with Nvidia's, so developers won't have to reprogram their entire stack.

Image source: Getty Images.

Alibaba on the rebound?

Alibaba has rebounded strongly off its lows of late 2022, more than doubling since then, but also sits about 63% below its all-time highs from late 2020. The stock trades for just 18 times earnings, which still seems cheap for a tech giant with an AI growth story.

Of course, most Chinese tech giants trade cheaper than their U.S. peers for geopolitical reasons, and Alibaba also has strong competition on the e-commerce side. Nevertheless, for those seeking some China-specific exposure, Alibaba should be on the list, if not near the top.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.