Chinese eCommerce giant Alibaba (BABA, has been on a superb run over the past six months, gaining upwards of 49% in value. After a sluggish phase from late 2020 through 2023, Alibaba stock is finally hitting its stride, showcasing healthy momentum as it climbs back to its pre-pandemic highs. Naturally, with its impressive rally, many are concerned about whether Alibaba stock has run too far. Given the tailwinds in play, spearheaded by the likely boost from China's massive stimulus plan, there still appears to be significant growth potential for the stock ahead.

The Stimulus-Driven Comeback in Chinese Stocks

• Warning! GuruFocus has detected 6 Warning Signs with BABA.

The dramatic shifts in China's monetary policy of late, led by unexpected interest rate cuts and a dovish stance, have fueled a superb rally in Chinese equities. Pan Gongsheng, Governor of the People's Bank of China, announced sweeping economic measures, including reducing the 7-day reverse repo rate from 1.7% to 1.5%. With a firmer commitment to rejuvenating China's economic landscape, Chinese stocks have been running hot of late.

In fact, Chinese stocks recorded their highest gains since 2008 in the past couple of weeks. The SPDR S&P China ETF (GXC), for instance, has outperformed the S&P 500 by a sizeable margin. Over the past month, GXC stock has climbed more than 20%, comfortably beating the S&P 500's gain, showcasing its sustained bullish momentum in response to the economic stimulus.

Consequently, analysts are finally bullish on Chinese stocks. David Chao of Invesco Asset and Raymond Chen from ZiZhou Investment Asset Management expects strong fiscal measures to sustain the rally. Additionally, Laura Wang of Morgan Stanley sees a potential 10% short-term gain for the CSI 300 Index, indicating a marked shift in market sentiment, primarily due to the recent economic stimulus.

Since November 2020, when the Chinese government initiated a rigorous regulatory crackdown on major tech companies, Chinese tech stocks have been suppressed. Following the high-profile suspension of Ant Group's IPO, the landscape from 2020 to 2023 marked a major cooling period for the sector, marked by a focus on antitrust, data security, and financial regulations.

However, the recent economic changes aimed at stabilizing the Chinese property industry signal a pivotal shift. These interventions will likely alleviate major economic pressures, boost business conditions, and increase consumer spending power. Moreover, as we head toward late 2024, the strategic focus on economic revitalization could potentially lead to superb gains for Chinese stocks, especially Alibaba. It's important to note that from September 2014 to January 2020, Alibaba stock experienced a remarkable rise of 122%, hitting a high of $231. This period marked a golden era of growth for Chinese tech, supported by expansionary supportive government policies.

Surging Ahead In The AI Race

Alibaba has quickly become one of the top AI players, arguably the biggest long-term catalyst in driving the company's growth and enhancing its global footing. Through its Qwen AI model, it has cemented its position as one of the giants in the international AI landscape, going head-to-head with top models like OpenAI's GPT and others.

Source: Neowin.net

The image above sheds light on the capabilities of Alibaba's AI model, Qwen2-VL-7B, comparing it with GPT-40-mini and other models across key benchmarks. The Qwen2-VL-7B demonstrates robust utility in complex document interpretation and enterprise applications, including other complex tasks.

Furthermore, the tech giant's recent partnerships with industry bellwethers like Nvidia (NVDA, Financial) and Mastercard (MA, Financial) showcase its AI-powered capabilities, including autonomous mobility. The integration of its AI model with Nvidia's Drive AGX Orin platform, perhaps one of the most promising future sectors, bolsters its appeal as an AI play. Also, Qwen's link to AliAlibaba's own mammoth platforms like Taobao and DingTalk, each with north of 600 million active users, underscores the powerful, robust infrastructure Alibaba has built to support its AI-driven services.

Most recently, the company released more than 100 open-source AI models, having released its powerful text-to-video tool at its Apsara Cloud event. Also, a potential partnership with Apple to integrate AI adds new layers to Alibaba's growth story, fortifying its credentials in the niche. Hence, the company's comprehensive AI strategy isn't just about its current operations but is also strategically positioning it for substantial future growth.

Cloud Surge Fuels Stellar Profitability Rebound

Despite some inconsistency in top-line growth over the past few years, Alibaba's robust profitability numbers continue to impress.

As depicted in the visual, Alibaba attracts a superb 8 on 10 rating from GuruFocus, underscoring its robust bottom-line health compared to sector benchmarks. Starting with its gross margin stands at an impressive 37.9%, highlighting its ability to maintain healthy profits relative to sales. Moreover, its operating margin is solid at 12.12%, indicating efficient management operations despite operating in a competitive landscape.

However, its net margin stands at 7.36% while its ROA is at 3.9%, suggesting that while Alibaba is profitable, there are areas where it needs to step up its game with regard to efficiency in turning assets into net income. Also, its FCF margin of 18% is commendable, reflecting robust cash generation capabilities that remain critical in sustaining operations and funding future expansions.

Moreover, Alibaba's ROC (Joel Greenblatt (Trades, Portfolio)) is at 57.3%, dramatically outperforming many of its competitors, highlighting its effectiveness in generating returns from capital investments. Additionally, with 10 consecutive years of profitability, Alibaba's financial stability has shielded it from previous crises, positioning it to thrive in the competitive landscape.

A huge part of Alibaba's margin growth has been the expansion of its Cloud business, which is emerging as a key growth engine for Alibaba. Despite a challenging retail environment in China and a brief dip in cloud sales last year, the integration of advanced AI technologies has revitalized this segment, driving a strong rebound in recent results.

Chart Based on Author's Own Data

From the chart above we can see that Alibaba Cloud has shown impressive growth over the years, as shown by its revenue trajectory from 2018 to 2023. Despite a sizeable dip in 2023, the cloud division's rapid expansion from $2,135 million in 2018 to a peak of $11,763 million in 2022 highlights its expanding influence within Alibaba. Moreover, as per recent financials, Alibaba's Cloud Intelligence Group contributes significantly to sales, which accounts for 11.3% of the pie, underscoring the cloud sector's expanding influence.

Also, from the graphic above, it's clear that the company draws sales from an array of sources. Though it still generates the lion's share of sales from Taobao and Tmall Group at 46.2%, other segments collectively contribute over 30%, which is imperative in stabilizing the company's financials against sector-specific downturns while helping to capitalize on multiple growth avenues.

In its most recent showing in Q2 2024, Alibaba Cloud grew superbly, with segment-wise revenue reaching $3.64 billion, marking a 6% increase YOY. This growth is propelled by AI-driven products, reflecting a powerful demand in the AI sector, which Alibaba is tapping into. Also, Alibaba CEO Eddie Wu emphasized the pervasive impact of AI on the cloud division's future, projecting double-digit growth in the latter half of 2024. Hence, the substantial investments in AI and cloud infrastructure that Alibaba has been making signal its intent to accelerate this momentum, ensuring its competitive edge in a fast-evolving digital landscape.

Alibaba Stock Still Has Room To Grow

Alibaba's stock performance has demonstrated superb gains over the past year, with stellar gains across various timeframes. Over the past month and three months, Alibaba has achieved healthy returns of more than 27% and 47%, respectively, outpacing its competition in PDD and MELI over the short term. Despite the challenges over the past three to five years, the tailwinds propelling Alibaba suggest it is positioned excellently to maintain its growth and continue delivering substantial returns for its investors.

Furthermore, based on the 12-month price target chart for Alibaba points to a consensus target of $108.40, with a potential increase of 2.15%. It's important to note that projections range significantly, with a $146 high estimate and a low of $79.70. Despite the volatility expected in Alibaba stock, I expect favorable market tailwinds to continue driving more upside as optimism in Chinese equities continues moving from strength to strength.

Furthermore, if we look at the value of Alibaba stock based on the discounted cash flow (DCF) method, we see that there's still plenty of upside left in the stock.

The DCF analysis is based on the company's TTM free cash flow (FCF) per share, projecting a fair value of $146.07, which is significantly above the current stock price. This indicates a margin of safety of more than 26%. Additionally, the model includes key variables including a 10% discount rate, reflecting the risk and time value of money. Also, the analysis is broken down into the growth and terminal stages. For the growth stage, a 10-year period is assumed with an annual growth rate of 8.3%, which amounts to a growth value of $86.28. For the terminal stage, also spanning 10 years, a lower growth rate of 4% results in a terminal value of $59.8. Given the sizeable margin of safety, there is hefty opportunity for capital appreciation, which shows that Alibaba stock's current price may not fully reflect its future cash flow potential, making it an attractive value investment.

Takeaway on Alibaba Stock

Despite the run-up in value, I expect Alibaba stock to continue rising in value on the back of multiple tailwinds. Perhaps the biggest boost the stock is centered around China's economic stimulus measures, that led to a broader rally in Chinese equities. Moreover, Alibaba's inroads in the AI realm and cloud business expansion bolster its growth prospects further. Also, despite past challenges, Alibaba will likely continue sustaining its momentum with key drivers like cloud growth, AI innovations, and higher consumer spending. Also, a DCF analysis based on realistic assumptions points to a fair value of $146.07, implying a strong margin of safety and capital appreciation potential.

This article first appeared on GuruFocus.