A fund manager overseeing $17 billion in assets stated that the current stock price of Alibaba (BABA.US) only reflects the value of its e-commerce business and does not account for the growth potential of its artificial intelligence (AI) operations. In recent months, global market concerns over AI investments by major cloud service providers, combined with ongoing domestic price competition, have pressured Chinese technology stocks. This has dampened Alibaba's previous strong upward momentum, with its Hong Kong stock price declining 26% from its October high.
Christian Heck, a portfolio manager at First Eagle Investments in New York, believes that the company's well-known online retail business in China provides a margin of safety. "If you do the math, Alibaba's AI business currently comes entirely for free, equivalent to a free call option," Heck said in a Tuesday interview. "I find this an extremely attractive setup." The First Eagle Overseas Fund, which he co-manages, has achieved a 31% return over the past year, outperforming 85% of its peers.
Heck analyzed that Alibaba's appeal also lies in its business portfolio covering the entire AI industry chain, from infrastructure to proprietary models and open-source models. This comprehensive positioning contrasts sharply with technology firms like OpenAI and Oracle (ORCL.US), which focus on specific areas. "They possess exceptional capabilities across the entire AI technology stack, which is extremely rare," Heck emphasized. "Alibaba's AI business has the potential to become a highly profitable segment."
Adhering to an investment philosophy of seeking undervalued quality companies, First Eagle initiated a position in Alibaba three years ago. The stock currently trades at a price-to-earnings ratio of 16 times based on expected earnings for the next 12 months, down from a recent peak of 22 times. The Chinese internet giant will report its third-quarter results on Thursday. Earlier this month, Alibaba announced a major strategic shift to focus on commercializing AI, and on Wednesday it revealed price increases of up to 34% for its AI computing power and storage products.