To The Moon

$Alibaba(BABA)$ $BABA-W(09988)$

Today, we'll be discussing the Chinese e-commerce giant Alibaba. Recently, Alibaba announced an 85% reduction in the prices of their large language models. At first glance, this may seem like a negative development, signaling increased competition in the market. However, there are some important factors to consider, which we’ll explore in this article. These changes may actually be positive for Alibaba and the broader Chinese economy. We’ll also examine how these adjustments could impact Alibaba’s underlying metrics.

Now, let’s start our focus back to Alibaba. Year-to-date in 2024, Alibaba’s stock has risen nearly 14%. This is noteworthy, considering the past five years have been challenging for the company. Since peaking at around $310 per share in 2020, the stock has declined 72% from its all-time high. While the recent increase might suggest a turnaround, the situation is more nuanced. Today, we learned that Alibaba is cutting the prices of its AI large language models by up to 85%.

In a WeChat post, Alibaba revealed significant price reductions for its visual language model, Qwen-VL, which processes both text and images. These cuts highlight the growing competition in China’s AI market, with major players like Tencent, Baidu, JD, Huawei, and ByteDance all launching large language models in the past 18 months. Despite this competition, the market is projected to grow rapidly, from $34.2 billion in 2024 to $154.8 billion by 2030.

However, I believe these projections may be overly optimistic. While the market could double to $60–90 billion in the next 4–5 years, reaching $154 billion seems ambitious, especially since China tends to adopt new technologies more slowly than the U.S.

In my view, competition isn’t necessarily bad for Alibaba. The company is well-positioned to maintain its dominance in AI, much like it has in cloud computing. These two sectors are interconnected, and businesses seeking cloud services are likely to consider Alibaba for AI solutions as well. Increased competition may also help Alibaba avoid regulatory challenges. For example, in 2021, the Chinese government fined Alibaba $2.8 billion for violating anti-monopoly laws. With more competition in the market, regulatory scrutiny might ease.

While Alibaba has reduced prices for both AI and cloud products, I believe this is a strategic move to strengthen its leadership in these markets. Over the long term, Alibaba’s position as the top player in China’s tech industry is likely to be a significant advantage. An unexpected way this price reduction could benefit Alibaba is by highlighting broader economic challenges in China, potentially contributing to deflationary pressures. In 2019, China’s inflation rate was around 3%, but since then, it has steadily declined. By 2023, inflation dropped to 2.3%, and early 2024 reports indicate an average price decrease of 8% across the board, with consumer prices rising by only 0.3%. These trends suggest that China has entered a deflationary period, and Alibaba’s price cuts could further amplify this effect.

This deflationary pressure might push the Chinese government to roll out additional economic stimulus. Analysts have criticized the current stimulus measures as insufficient to drive the growth needed to revitalize the economy. More robust stimulus policies could ultimately benefit both Alibaba and the broader Chinese market.

Alibaba is also positioning itself strategically by focusing on enterprise applications for large language models rather than consumer-facing AI products like OpenAI’s ChatGPT. This aligns with Alibaba’s business model, which connects suppliers in China with businesses worldwide. By addressing challenges like language and time barriers, these AI models can enhance customer experiences and boost sales for suppliers.

Despite a weak economy and deflation, Alibaba’s trailing 12-month revenue remains close to its all-time high, currently at $134.4 billion, compared to the record $134.5 billion. The company is also approaching double-digit year-over-year growth, with a 9.4% increase reported in the most recent quarter.

While Alibaba has maintained high revenue levels, they’ve sacrificed some profitability. Their trailing 12-month EPS is $4.97, down from previous highs. However, Alibaba has been actively reducing its outstanding shares, with a nearly 6% decrease year-over-year. Analysts forecast improvements in non-GAAP EPS, expecting $8.70 in 2025 (up from $8.53 in 2024) and a significant increase to $9.70 in 2026.

These projections reflect optimism that the Chinese economy will begin to recover in the next year or two. For 2026, analysts predict an 8.5% revenue increase for Alibaba. If economic conditions improve, Alibaba’s top-line growth could rise by 10–15%, potentially driving both revenue and profitability.

At a forward P/E ratio of 8.75, Alibaba’s valuation is significantly below the broader market range of 20–25. A reversion to the market average could result in the stock price doubling or even tripling. While the stock has traded sideways in recent years, a turnaround in China’s economy could lead to substantial gains for Alibaba.

That said, investing always carries risks, and it’s essential to conduct your own research to ensure a company aligns with your financial goals and risk tolerance.

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