Best Stock to Buy Right Now: Alibaba vs. Tencent

Alibaba (NYSE: BABA) and Tencent (OTC: TCEHY) are two of China's largest tech companies. Alibaba owns the country's largest e-commerce marketplaces and top cloud infrastructure platform. Tencent owns China's largest social media platform, one of the country's leading cloud infrastructure platforms, and the world's largest video game publishing business. Both companies are expanding their artificial intelligence (AI) ecosystems with new large language models (LLMs), generative AI applications, and autonomous driving services.

Both stocks might appear to be reliable investments in China's economic expansion. Yet, over the past five years, Alibaba's stock has declined by nearly 40%, while Tencent's stock has risen by only 6%. They lost their luster as China's economic growth cooled off, they faced intense scrutiny from antitrust regulators, and the trade war curbed the market's appetite for Chinese equities. Should you invest in either of these out-of-favor Chinese bellwethers today?

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Alibaba's high-growth days are over

Alibaba generates most of its revenue and profits from its two most significant Chinese marketplaces, Taobao and Tmall. A smaller slice of its revenue comes from its cloud infrastructure business, which operates at lower margins than its e-commerce marketplaces.

In 2021, China's antitrust regulators barred Taobao and Tmall from locking in their merchants with exclusive deals, using loss-leading promotions to gain new customers, and expanding with unapproved investments and acquisitions. Those restrictions throttled its growth and eroded its defenses against its top competitors, PDD (NASDAQ: PDD) and JD.com (NASDAQ: JD).

That pressure forced Alibaba to rely on its overseas marketplaces (including Lazada in Southeast Asia, Trendyol in Turkey, Daraz in South Asia, and AliExpress for cross-border purchases) and its Cainiao logistics business to drive its top-line growth. However, that strategy compresses its margins because those faster-growing businesses are still unprofitable.

From fiscal 2025 (which ended in March 2025) to fiscal 2028, analysts expect Alibaba's revenue and earnings per share (EPS) to grow at a CAGR of 8% and 11%, respectively. Its high-growth days are over, but it could stabilize Taobao and Tmall with AI-driven recommendations, new merchant tools, and logistics upgrades over the next few years. It also expects the AI boom to generate strong tailwinds for its cloud infrastructure business. The stable growth of its e-commerce and cloud businesses could free up more resources to expand its lower-margin international marketplaces and Cainiao's new third-party logistics services.

Tencent faces similar challenges

Tencent's core growth engine is WeChat (known as Weixin in China), a "super app" which bundles together messaging, news, e-commerce, payment, and gaming features for more than 1.41 billion monthly active users (MAUs). Its other main growth engine is its video game business, which publishes titles such as Honor of Kings, PUBG Mobile, Call of Duty: Mobile, League of Legends, Clash of Clans, Pokémon Unite, and other hit games.

WeChat remains a vital app for everyday life in China, but it faces fierce competition from ByteDance's Douyin (known as TikTok overseas) and other rapidly growing apps. Meanwhile, China's government regulators are tightening their grip on its booming video game market by approving fewer titles and implementing playtime restrictions for minors. Those regulatory headwinds curbed the growth of Tencent's gaming business.

To offset that pressure, Tencent is expanding its higher-growth fintech and business services segment, which houses its WeChat Pay digital payments platform, Tencent Cloud infrastructure platform, and other enterprise-oriented services. It's also upgrading its targeted ads with new AI algorithms to squeeze more revenue from WeChat's existing users and expanding its overseas gaming business to reduce its dependence on the Chinese market.

Those new strategies are helping to stabilize Tencent's revenue and earnings growth. From 2024 to 2027, analysts expect its revenue and EPS to grow at a CAGR of 11% and 15%, respectively. The integration of its LLM into more WeChat ads, gaming, and enterprise features -- along with the growth of its gaming and cloud businesses -- should drive that growth.

Which stock is a better value?

Alibaba and Tencent are trading at 17 times and 20 times their next year's earnings, respectively. Alibaba might seem cheaper, but it's also growing at a slower rate and faces more formidable competitors in its core e-commerce market. Tencent also faces competitors in the advertising and gaming markets, but WeChat is still an irreplaceable app for its core Chinese users.

Both stocks could attract more investors if the trade tensions between the U.S. and China ease. However, Tencent seems like a more stable growth play than Alibaba -- which still needs to carefully expand its higher-growth businesses without crushing its own margins.

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