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Nvidia‘s long been the poster child for the AI theme. Yet given the recent push past its $5trn market-cap and concerns around valuation, I don’t feel it’s the best value right now.
However, there’s another growth share that’s up 71% over the past year that I think still looks very attractive.
A pivot paying off
I’m talking about Alibaba (NYSE:BABA). The stock’s up 71% over the past year, as it has strongly pivoted to focus on AI and cloud growth, committing to invest heavily in related infrastructure.
For example, in February, it announced that it would invest at least $52bn over the next three years in cloud and AI. That signalled to the market that it’s repositioning beyond its e-commerce roots and aiming to capture the lucrative AI market.
It’s already starting to see benefits in this regard. Although we won’t receive the latest quarterly results until next week, the cloud computing division’s revenue jumped 26% year-over-year last time around.
The CEO commented: “AI-related product revenue is now a significant portion of revenue from external customers.“
In news out yesterday (13 November), the company announced it would be revamping its mobile AI app and adding features to make it more like ChatGPT. It plans to keep it free for users initially, to build a larger customer base. Yet eventually, it’ll likely charge for certain features. This is smart and provides another way of monetising AI products.
Talking about valuation
The jump in the share price this year reflects the optimism investors have, as well as the vision they share with management about how the AI pivot could play out. Yet some might be surprised that the price-to-earnings ratio is 19.71. This compares to Nvidia at 58.72.
I think this is a key factor that makes the growth share attractive relative to Nvidia and other AI-related peers. This means there’s room for the share price to rally before it becomes potentially overvalued, even if earnings per share remain unchanged.
Some have stayed away from the stock in recent years due to investor concerns about a slowdown in China and regulatory concerns. Yet I feel that this is shifting now, as more of the focus is on the immense potential in Asia for AI.
Of course, the geopolitical situation in China will always remain a risk in some form. Alibaba remains subject to Chinese regulation and US-China trade tensions. These risks could derail sentiment in the future.
The bottom line
I think few would argue that AI’s going to remain a dominant theme in the stock market for the coming few years. At the same time, the surge in interest has pushed some stocks to overinflated levels. Therefore, for investors looking to get exposure to this sector but want to be smart in where they allocate their money, Alibaba could definitely be worth considering.
