Why I'm Cautiously Optimistic About Alibaba Stock

Key Points

• Cloud AI is gaining traction.

• Alibaba is testing in-house AI chips.

• The market sentiment for Alibaba stock is shifting.

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Alibaba Group (NYSE: BABA) has tested investors' patience over the past few years. From regulatory crackdowns to slowing consumer spending and intensifying competition from Pinduoduo and Meituan, the company went from China's undisputed tech champion to a stock many investors gave up on.

But the latest results suggest there are reasons to turn more optimistic. While risks remain, Alibaba is showing early signs of strategic progress in areas that matter for the long run. Here are three reasons investors should take another look.

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Image source: Getty Images.

1. Cloud and AI are driving real growth

For years, Alibaba Cloud was a disappointment to investors. Despite being China's market leader, growth slowed and profits remained elusive. That narrative is beginning to change.

In its June 2025 quarter (fiscal Q1 2026), Alibaba reported cloud revenue up 26% year over year to RMB 33.4 billion ($4.7 billion), significantly outpacing the company's overall revenue growth of 10%. Even more telling, management disclosed that artificial intelligence (AI)-related revenue grew at triple-digit rates for the eighth consecutive quarter, and now accounts for more than 20% of Alibaba Cloud's external revenue.

That's not just a rebound -- it's a structural shift. AI workloads are far more compute-intensive than traditional hosting, which means higher revenue per customer, better margins, and stickier client relationships. With its large language model, Tongyi Qianwen, along with AI-powered enterprise tools, Alibaba is no longer just a cloud infrastructure provider. It's becoming an AI platform, which could prove to be a durable growth engine.

2. Building strategic resilience with domestic AI chips

Another reason for optimism is Alibaba's investment in semiconductor design. Reports indicate the company is testing its own AI inference chip, a critical step in reducing dependence on U.S. technology amid export restrictions.

To be clear, Alibaba isn't about to replace Nvidia for training large-scale models. But inference -- running AI models in real-world applications -- is where much of the usage (and monetization) occurs. By developing its own inference chips, Alibaba is hedging against supply chain risks and ensuring it can scale AI services without being entirely at the mercy of geopolitical tensions.

This strategy matters because it protects Alibaba's ability to commercialize AI across its businesses -- from cloud computing to e-commerce and logistics. And while there is no plan to offer these chips to external customers, there is no reason to think that this cannot change in the future, opening up a new potential revenue source.

In other words, Alibaba's investment in domestic chips is both a defensive and potentially offensive move that investors should not overlook.

3. Encouraging signs of a sentiment shift

Finally, sentiment may be slowly turning in Alibaba's favor. Following the latest results, Mizuho, Bernstein, and Citi all raised their price targets or reiterated buy/outperform ratings, pointing to cloud growth and AI adoption as key catalysts.

Analysts' upgrades don't guarantee a smooth recovery. In fact, Alibaba has plenty more to do to regain long-term investors' confidence, such as returning to sustainable growth in its e-commerce business, reducing the losses of its other companies, and growing its other ventures, such as Ding Talk and entertainment.

But when Wall Street begins to rerate a stock after years of negativity, it often signals a shift in how investors view the company's future potential. If Alibaba can execute in the coming quarters, there's a good chance that the stock price may start to reflect these positive developments.

For perspective, Alibaba's stock trades at a price-to-sales ratio of just 2.4 times, which is just a fraction of its peak valuation of 15.5 times. So, owning the stock now offers downside protection, as well as upside opportunity.

What it means for investors

Alibaba is far from risk-free. Competition in e-commerce remains fierce, and China's macroeconomic backdrop is still uncertain.

But beneath the noise, Alibaba is showing encouraging signs: Its cloud business is gaining momentum thanks to AI, it's building strategic resilience with domestic chip development, and sentiment is finally beginning to thaw.

For long-term investors, that combination may be the clearest reason in years to be cautiously optimistic about holding Alibaba stock.

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Citigroup is an advertising partner of Motley Fool Money. Lawrence Nga has positions in Alibaba Group and PDD Holdings. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.