Alibaba AI Business Is "Free Call Option," First Eagle Fund Says

The current share price of Alibaba Group Holdings Ltd. only reflects the value of its e-commerce operations, failing to incorporate its potential in artificial intelligence, according to the manager of a $17 billion fund.

In recent months, international apprehension regarding AI expenditure by major cloud providers and ongoing price competition within China have negatively impacted the country's technology stocks, dampening Alibaba's significant upward trend. The company's shares listed in Hong Kong have declined by 26% from their peak in October.

Christian Heck, a portfolio manager at First Eagle Investments Management based in New York, stated that the Chinese firm's established online retail business offers a "margin of safety." He remarked that the AI division is effectively a cost-free opportunity for growth when evaluating the company's overall valuation.

"I think that's an attractive setup," Heck commented during an interview on Tuesday. He co-manages the First Eagle Overseas Fund, which achieved a 31% return over the past year, outperforming 85% of comparable funds.

Heck also noted that Alibaba is appealing due to its diverse portfolio of AI-related businesses, spanning from infrastructure to both proprietary and open-source models. This broad scope differentiates it from more specialized technology companies like OpenAI and Oracle Corp., the fund manager explained.

"They have very good AI capabilities throughout the entire stack, which is quite rare," Heck said. He added that Alibaba's AI operations have the potential to evolve into a large and profitable enterprise.

First Eagle, which focuses on identifying high-quality businesses available at discounted valuations, initiated its investment in Alibaba over three years ago. The stock is currently trading at 16 times estimated earnings for the next twelve months, a decrease from a recent peak of nearly 22 times.

The Chinese internet giant is set to announce its third-quarter financial results later on Thursday. Earlier this month, Alibaba unveiled a significant restructuring plan aimed at prioritizing the monetization of its AI technologies. Furthermore, on Wednesday, the company announced it would increase prices for its AI computing and storage products by up to 34%.