Alibaba's surge in AI revenue has lifted its securities by 11%. What will ensure continued growth?

Shares of Chinese Internet giant Alibaba jumped almost 11% in US trading thanks to the publication of quarterly reports. The company reported a double-digit increase in revenue from artificial intelligence and cloud services, which overshadowed in the eyes of investors weak sales growth in general and a decline in operating profit. In addition, the market may have been influenced by a WSJ report that Alibaba has developed a new chip for AI: the company aims to create a replacement for Nvidia processors, which cannot be shipped to China.

Alibaba's depositary receipts rose 10.6% to $132.3 per paper shortly after the opening of trading in the US. This was the highest price since mid-M Ma.

The Chinese e-commerce giant on Aug. 29 reported "triple-digit" revenue growth from artificial intelligence-related products for the eighth consecutive quarter, as well as a 26% increase in revenue from its cloud division for the quarter ended June 30.

Alibaba's net profit for the quarter amounted to $5.9 billion, significantly exceeding expectations ($3.7 billion) due to investment revaluation and the sale of a stake in the Turkish marketplace Trendyol, Barron's wrote. But revenue was generally below forecasts: it increased by only 2% to $34.6 billion versus expectations of $35 billion, the publication added. Operating profit fell by 3% to $4.9 bln.

Alibaba's cloud and AI revenue helped reassure investors who were worried about the price war Alibaba is engaged in in China alongside Meituan and JD.com, Bloomberg noted. The company is struggling to hold on to market share amid increasingly fierce competition in retail. The intensifying pressure is already affecting the industry, with JD.com's quarterly profit halved and Meituan warning of large losses, prompting a $27 billion selloff in shares of the three companies this week, the agency wrote.

Consumer confidence in China is being undermined by a prolonged real estate crisis, low wage growth and global trade disruptions. Even aggressive discounts have failed to reverse buyers' caution, Bloomberg said.

Alibaba investors could also be encouraged by the company's technological achievement, Barron's suggested. The Wall Street Journal reported that Alibaba has developed a proprietary chip that can handle a wider range of tasks in enabling artificial intelligence. The chip was a step up from the company's previous models, the WSJ noted.

Alibaba and other Chinese tech giants are looking to create alternatives to products from US-based Nvidia, which cannot ship its most advanced designs to China because of US restrictions, Barron's added.

As Investing.com writes, Alibaba's achievement fits into Beijing's larger strategy to create its own independent AI supply chain. The Financial Times reported on August 27 that Chinese chipmakers intend to triple production of AI chips in order to create their own, Chinese ecosystem and challenge Nvidia's global leadership.

Alibaba is balancing investments in AI and new online commerce models with the need to demonstrate growth in a highly competitive Chinese market, CNBC notes. Investors have so far rewarded its efforts: the U.S.-traded stock has added about 40% since the beginning of the year, outperforming the MSCI China Index (28%).

According to Benchmark analyst Von Jiang, Alibaba's position as a leading provider of cloud services and generative AI, remains unchanged. Benchmark recommends buying the company's securities, writes Barron's.

Alibaba receipts have 44 recommendations from analysts, MarketWatch shows. Almost unanimously, they advise buying (32 Buy and 10 Overweight ratings): only two think it's better to hold (Hold). According to TipRanks, the average target price for Alibaba shares is $148.5, which implies a potential upside of about 13% from current levels.

This article was AI-translated and verified by a human editor