Alibaba (NYSE: BABA) shares got a nice boost following the Chinese company's fiscal third-quarter results, which showed a nice rebound in its e-commerce business as well as strong artificial intelligence (AI) growth.
The stock has had a tough past five years, losing about a third of its value, but it has been rallying lately. The stock is now up about 70% year to date and has nearly doubled over the past year as of this writing.
Let's take a closer look at Alibaba's most recent earnings to see if the stock's rally can continue.
The turnaround is taking shape
Alibaba's largest business remains its e-commerce segment, which consists of leading Chinese e-commerce platforms Tmall and Taobao. Tmall is China's premier e-commerce marketplace where established brands sell their merchandise, while Taobao is a platform used by both individuals and businesses to sell merchandise.
The company's e-commerce business has been under pressure the past few years from heavy competition, especially from PDD's Pinduoduo platform, as well as a weak Chinese consumer economy.
However, the segment posted solid 5% growth in its fiscal third quarter (ended in December) to $18.6 billion, including 9% growth in its important third-party business. Alibaba credited the growth to higher gross merchandise value (GMV), which is the total value of goods sold through its platforms, and a high take rate (the fees charged by the platforms themselves).
Management also noted that it was seeing more uptake of its new AI marketing tool Quanzhantui, and that it benefited from the new software service fee it implemented. Its segment earnings before interest, taxes, and amortization (EBITA) rose 2% to $8.4 billion.
The company said it is also seeing solid customer growth. This included double-digit growth for its 88VIP premium memberships, which reached 49 million at the quarter's end.
Its cloud intelligence group, or cloud computing segment, saw revenue jump 13% to $4.3 billion. AI-related revenue soared by triple digits for the sixth straight quarter. The segment's adjusted EBITA, meanwhile, climbed 33% to $430 million. The company touted its foundational AI model Qwen 2.5-Max, noting its industry-leading performance.
Alibaba said it will invest aggressively in AI infrastructure, with plans to spend more in the next three years than it has over the last decade. It said its goal is to achieve AGI (artificial general intelligence), where AI can attain 80% of human capabilities.
The company's other businesses also generally showed strong revenue growth, led by a 32% increase to $5.2 billion from its international commerce segment (AIDC). These emerging businesses continue to scale up but are currently largely unprofitable.
However, management is looking for AIDC to turn in its first profitable quarter within the next fiscal year. That would be a big improvement from the $678 million EBITA loss it reported in the fiscal third quarter.
Overall, Alibaba's revenue rose 8% to $38.4 billion. Adjusted earnings per American depositary share climbed 13% to $2.93, while adjusted earnings before interest, taxes, depreciation, and amortization rose 4% to $7.5 billion. Free cash flow came in at $5.3 billion.
Alibaba ended the quarter with $54.8 billion in cash and short-term investments and $31.7 billion in debt. It also had $47.4 billion in equity and other investments on its balance sheet.
Image source: Getty Images.
Is it too late to buy Alibaba stock?
Alibaba has invested heavily to help turn around its e-commerce businesses, and this quarter bore the fruit of those efforts. Its GMV had been improving, but this quarter, it was able to take that GMV growth and translate it into solid increases in revenue and EBITA. Its Quanzhantui marketing tool appears to be gaining traction, while there was no detrimental impact from the small technology service charge it introduced.
The company also continues to be an AI leader in China. It recently won a deal with Apple to provide the AI behind Apple Intelligence in China, while it continues to see solid growth in its cloud computing unit. Meanwhile, it is still benefiting from a profitability standpoint as low-margin contracts expire.
And the Chinese government appears to be fully behind the country's tech companies in the AI race. Alibaba founder Jack Ma, who had been persona non grata after criticizing China's financial sector in 2020, was recently photographed with other business leaders meeting with China's president, Xi Jinping.
The Chinese government has had its differences with the tech sector in the past, but Xi has encouraged these companies to innovate and grow. That's all good news for a company like Alibaba.
Looking at valuation, Alibaba stock remains cheap, trading at a forward price-to-earnings ratio (P/E) under 15 for fiscal 2026 analyst estimates and a price/earnings-to-growth (PEG) under 0.4, with PEGs below 1 usually view as undervalued.
With the stock still inexpensive and a turnaround taking hold, Alibaba remains an attractive investment. The company is becoming a Chinese AI leader, which should help lift its valuation multiple, while flipping its AIDC business to profitability should also be a nice lift to earnings.
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Geoffrey Seiler has positions in Alibaba Group. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
