2025 has turned out to be the most exciting year for Alibaba's (BABA 0.37%) investors. The stock has surged 68% (as of this writing), reaching a level unseen since 2021.

After ignoring the tech giant for years, investors are finally paying attention to it again, thanks to the stabilization of its financial performance and its prospects in the artificial intelligence (AI) race.

But is Alibaba's stock still a buy after its recent rally? Let's explore further.

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The worst could be over for the e-commerce business

Once a leader in the e-commerce scene, Alibaba has faced increasing competition from its younger peers like Pinduoduo and Douying in the last few years, resulting in almost no growth in the previous two years.

Yet, the tech giant has made several huge adjustments to its business model, such as shifting its focus from merchants to consumers, reducing prices, and using artificial intelligence (AI) to improve user experience. The pivot has delivered early results, suggesting that Alibaba is heading in the right direction.

For instance, Alibaba's Taobao and Tmall grew their customer management revenue by 9% in the quarter ended Dec. 31, 2024, driven by growth in gross merchandise value (GMV) and take-rate. Another indicator of improvement in customer satisfaction is the double-digit growth in their 88VIP members (the highest-spending consumer group on the platform) to 49 million in that quarter.

While the local e-commerce business is picking up steam, the international e-commerce business continues its rapid expansion. Revenue surged 32% in the quarter ended Dec. 31, 2024 . Alibaba's overseas expansion diversifies its revenue base and opens new growth opportunities. Better still, it favorably positions the e-commerce business to sustain its long-term growth rather than relying on just the Chinese market.

Cloud computing and AI present tremendous opportunities

One of the biggest current trends is the advancement and adoption of AI, which is set to create enormous opportunities for those who are prepared. According to Statista , the AI market is estimated at $244 billion in 2025 and could reach $827 billion by 2030.

While most investors generally focus on leading companies in the U.S. when investing in AI-related companies, the rise of DeepSeek and Alibaba's latest partnership with Apple to integrate AI features into iPhones sold in China suggest that investors can no longer ignore the role of Chinese companies in this evolution.

As a leading technology company in China, Alibaba is well-positioned to capture a significant market share in the AI industry. It has the largest and most advanced cloud computing infrastructure in China, making it the natural choice for most companies looking for AI services.

Besides, Alibaba has spent years developing its AI models, like Qwen, and has incorporated AI software into its business operations. Unlike many new start-ups still in the early stages of creating and perfecting their AI models, Alibaba already has plenty of experience using AI to solve its internal business problems, positioning itself well to offer these solutions to its external customers.

To capture this vast opportunity, Alibaba plans to invest more than $50 billion in the next three years to build the necessary infrastructure to support its growth. The company also aims to increase the research and development investment in developing AI foundation models and AI-native apps. In short, the tech giant is going all-in in the cloud computing and AI business.

But there are risks to consider

While the uncertainties surrounding Alibaba's key businesses have largely dissipated, the company still faces risks that could affect its ability to create shareholder value.

The tech conglomerate has to deal with China-related risks, particularly regulatory, political, and geopolitical risks. This requires Alibaba to position its business in favor of the country's long-term interests, and may affect Alibaba's international business expansion.

Besides, investors have to deal with uncertainties in sentiments, which can easily sway from positive to negative again. For example, if the Trump administration bans local funds from owning Chinese companies, investors would have no choice but to sell the stocks, even though the company may have solid long-term prospects.

In short, investors must accept the potential volatility of owning the stock, even though those factors may not be business-driven.

What it means for investors

Alibaba's recent financial performance suggests that the worst is over for the company. Its e-commerce growth has returned, and its cloud computing plus AI business is well-positioned for rapid expansion in the coming years.

Besides, the stock trades at an undemanding valuation despite its recent rally. For perspective, Alibaba's price-to-sales (P/S) ratio is 2.5 times, lagging Amazon's P/S ratio of 3.3 times .

Investors willing to stomach China-related risks could consider buying Alibaba's stock to gain exposure to Chinese e-commerce and AI growth potential.