4 Reasons to Buy Alibaba Stock Like There's No Tomorrow

If steep valuations for many of the market's most popular stocks have you wary of stepping into any of them, you're not alone. Plenty of investors are on the sidelines here, fearing a correction, yet simultaneously worried about missing out on more upside.

There is a solution: Just look a bit off the beaten path. The market's outrageous overall valuation is largely limited to massive U.S. technology companies with exposure to the artificial intelligence (AI) industry. Most everything else, everywhere else, is still reasonably affordable, with many of these names being compelling growth prospects.

Alibaba Group (BABA 8.08%) is one of the best of the best of these other names, for four specific reasons.

It casts a wide net

There's the Alibaba you know. That's the parent to China's online shopping platforms Tmall and Taobao, which collectively account for about 40% of China's total e-commerce. You may also be familiar with its AliExpress, which connects China's manufacturers with overseas consumers.

Then there's the Alibaba you don't know. The company also manages a sizable cloud computing business that's wading deeper into artificial intelligence, a YouTube-like streaming video platform known as YouKu, a logistics arm called Cainiao, and businesses in the healthcare, communications, fitness, and live entertainment industries.

In many ways it's like Amazon in North America, leveraging its reach into several different kinds of businesses to funnel consumers into a much larger ecosystem.

And it's casting that net in an ever-expanding ocean

Operating several complementary profit centers doesn't do any good if the opportunity for growth for any of them is lousy, of course. Fortunately, Alibaba's most important market is facing solid growth prospects.

Some investors might disagree, pointing to last month's weak exports (from China) following the country's disappointing retail sales in July. Meanwhile, China's real estate market continues to struggle, with prices still making multiyear lows.

Now take a step back and look at the bigger picture. China's exports to the United States in August may have fallen, in a manner of speaking, but they were still up 4.4% year over year -- they simply fell from July's red-hot growth pace of 7.2%.

July's retail sales in China were also up a solid 3.7% year over year, merely falling short of analysts' estimates for 4.6% growth based on unusually strong consumer spending in May and June. Just bear in mind that China's retail spending in the middle of last year was unusually light, setting the stage for exaggerated growth this year.

Also remember that China's industrial output improved 5.7% year over year in July, after growing 6.8% in June, seemingly unfazed by real estate woes.

The point is, while some parts of China's economy may be bumping into an occasional short-lived headwind, on balance it's actually doing pretty well -- well enough to drive overall economic growth of 4.5% in the quarter currently underway, according to Reuters, followed by 4% growth in Q4. That's slower than recent growth rates, but still solid, and certainly still more economic growth than you'll find in most other corners of the world, including within the United States.

To the extent that economic headwinds might stifle China's consumer spending, which is so important to Alibaba, they don't appear to be affecting the online sliver of the market. Nielsen IQ reports that while China's sales of fast-moving consumer goods improved a ho-hum 3.4% overall in Q2, online sales of these goods soared 16.2% year over year.

It's positioning to lead China's piece of the global AI market

Although consumer spending may be Alibaba's biggest revenue driver right now, the rise of artificial intelligence -- and the subsequent demand for cloud computing solutions -- could make this arm the company's fastest-growing and most profitable venture. Alibaba's cloud business grew a company-leading 26% during the second quarter of this year.

The best, however, may be yet to come.

See, the company's not just serving China's artificial intelligence industry. It's helping build it from the ground up. Alibaba's AI-powered chat app, Qwen, which is comparable to OpenAI's ChatGPT, will natively work with Apple's iPhones sold in China, perhaps establishing a business relationship that will be replicated by other consumer-facing technology outfits. Qwen is also capable of meeting the business needs of Alibaba's third-party online sellers.

The company's even building its own high-performance computer processor as part of a Beijing-encouraged effort to wean itself from dependence on technology made by American semiconductor outfits like Nvidia and Intel.

Don't dismiss China's collective ability to develop its own artificial intelligence industry, either, to use itself and to market to customers beyond the country's own borders. As Morgan Stanley analysts recently noted of China's homegrown AI efforts, "a sleeping giant awakens." And by the way, Morgan Stanley's analysts add that the use of artificial intelligence could add between 20 and 30 basis points to China's GDP growth rate over the next two to three years, spurring consumer spending more than is currently expected.

Alibaba is, of course, well positioned to feature prominently in all aspects of this growth.

Alibaba stock is surprisingly cheap

Perhaps the most surprising part of the story? You can buy into this growing e-commerce and artificial intelligence powerhouse for little more than a song. Unlike steeply valued stocks like Nvidia or software giant Microsoft, Alibaba shares (technically American depositary receipts) are currently priced at less than 20 times next year's expected earnings, despite the anticipated acceleration of its top- and bottom-line growth next year following this year's slight lull.

The analyst community thinks Alibaba is cheap, anyway. Its current consensus target of $164.63 stands 13% above the ticker's recent price. That's not a huge difference, but the gap was nearly halved by last week's massive post-earnings surge from the stock. Don't be surprised if this average target inches upward once analysts have a chance to fully assess its second-quarter report and make any bullish changes to their opinions.