This Artificial Intelligence Stock Is an Absolute Bargain Right Now, and It Could Skyrocket in 2026

Alibaba has been aggressively funding its AI and cloud strategy, spending over $17 billion on AI and cloud infrastructure in the trailing 12 months while its cloud-intelligence revenue rose 34% in the latest quarter and AI-related product revenue has exceeded 100% year-over-year growth for nine consecutive quarters. Its core Taobao and Tmall businesses still generated 45% of consolidated revenue but more than 100% of consolidated adjusted EBITDA with a 44% adjusted EBITDA margin in fiscal 2025, enabling dividends and 14 consecutive quarters of buybacks; the stock is up ~75% in 2025 and trades at under 16x forward earnings. The company is also positioned to support domestic AI chip production as an alternative to Nvidia amid trade frictions, underscoring the strategic and financial rationale for investors considering Alibaba as a discounted play on AI adoption in China and global e-commerce.

Analysis

Market structure: Alibaba (BABA) is positioned to capture outsized share of China’s AI infrastructure demand while its Taobao/Tmall cash flows (44% adjusted EBITDA margin in FY25) finance >$17bn of capex. Direct winners: Alibaba Cloud, domestic AI-chip partners, Chinese datacenter suppliers; losers: foreign chip vendors (NVDA exposure in China) and lower-margin global retail peers. Tightening AI demand signals continued strong pricing power for cloud compute and higher energy/metal demand for datacenter builds over 12–36 months.

Risk assessment: Key tail risks are regulatory moves in Beijing or new U.S. export controls that could cut off specialized software/toolchains, a failed domestic chip program, or an e‑commerce slowdown that reduces internal cash funding. Time horizons: immediate (days)—momentum/flow trades; short-term (0–6 months)—next quarterly prints will test AI revenue sustainability (>100% YoY has to persist); long-term (2–5 years)—ROIC must exceed heavy capex to justify valuation. Hidden dependency: BABA’s AI narrative relies on Taobao/Tmall profit recycling, not yet independent cloud profitability.

Trade implications: Core constructive view on BABA at <16x forward EPS implies asymmetric upside over 12–36 months. Direct plays: buy BABA equity and directional LEAPS; use put spreads as tail-hedges ahead of next earnings. Pair trade: long BABA vs short AMZN or global consumer retail exposure to express China AI secular gain vs US retail multiple compression. Cross-asset: expect modest pressure on Chinese USD bonds if capex accelerates FX needs, and elevated implied vols in NVDA/BABA around policy catalysts.

Contrarian angles: Consensus underestimates execution risk and potential software/ecosystem lock-in costs if China substitutes Nvidia with immature domestic chips — that could delay monetization by 12–24 months. Conversely, market may be underpricing free-cash-flow conversion given 14 quarters of buybacks/dividends; a positive regulatory signal or a >80% YoY AI revenue beat would likely re-rate BABA >20x forward within 6–12 months. Watch for unintended outcomes: capex inflation and rising energy intensity could compress margins despite top-line AI growth.

Key Decisions for Investors

• Consider establishing a 2–4% long position in BABA within global equity allocation, scaling in on any 10–20% pullback over the next 3 months; target a 12–36 month hold and take profits if BABA rerates above 20x forward EPS or if cloud AI revenue decelerates below +50% YoY on two consecutive quarters.
• Allocate 0.5–1.0% notional to BABA directional options: buy Jan 2027 LEAPS calls ~20–25% OTM (or nearest liquidity) to capture asymmetric upside; trim or roll if position gains >50% or if AI revenue growth drops below +60% YoY at next two earnings.
• Implement a pair trade: long BABA (equal-weight) vs short AMZN (half-size) over 6–18 months to express China AI/cloud upside vs US retail/consumer multiple risk; tighten the short if AMZN outperforms by >15% relative to BABA.
• Hedge regulatory/tail risk: purchase 3–6 month BABA put spreads (buy 5% OTM, sell 15% OTM) sized to cover ~0.5% of portfolio to limit downside from abrupt China policy or sanction news; reassess after the next two quarterly reports.