In a recent turn of events, significant developments have unfolded in the Chinese technology landscape, particularly focusing on Alibaba, one of the country's largest e-commerce giantsOn February 13, co-founder and chairman of Alibaba, Cai Chongxin, confirmed that the tech behemoth would collaborate with Apple in the realm of Artificial Intelligence (AI). This announcement aligns with the excitement surrounding the launch of new AI models during the Lunar New Year, notably the Qwen2.5-Max model from Alibaba, which explores the potential of large-scale AI applicationsThis underscores a pivotal moment for Alibaba as it navigates the current AI wave and seeks to redefine its market position.

More than just fluctuating stock prices, the dialogue surrounding Alibaba is now shifting towards what analysts are calling a "second growth curve." The question persists: amidst the burgeoning AI trend, can Alibaba and other technology companies in China expect a revaluation of their asset quality? Given the rapidly evolving technological landscape, this theme has become increasingly relevant.

Investors have begun to see signs of a reassessment of Alibaba's valueNotably, over the past month, Alibaba's stock price on the Hong Kong exchange surged by over 55%, while its American counterpart saw an increase of around 45%. This remarkable growth has led to Alibaba's stock price reaching a three-year high, driven largely by the increased interest in AI technologies.

The launch and subsequent success of the DeepSeek model have been instrumentalThis remarkable AI initiative has drawn attention to two primary developmentsFirstly, as DeepSeek significantly reduces the cost of training large models, there's been a rush of both companies and individuals into the AI training phaseThis uptick in demand underscores the necessity for robust cloud computing platforms like Alibaba Cloud, which is positioned to meet this growing needSecondly, DeepSeek’s prominence has triggered discussions globally about China's advancements in AI technology

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Achieving the number one spot on the iOS app charts in over a hundred countries during the Lunar New Year period, DeepSeek surpassed ChatGPT for downloads, showcasing a newfound confidence in the capabilities of Chinese tech firms.

Additionally, Alibaba Cloud has recently gained prominent attentionIts Qwen2.5-Max model debuted with a sophisticated MoE (Mixture of Experts) architecture, utilizing over 20 trillion tokens of pre-training dataImpressively, it ranked seventh in global assessments on reputable platforms like ChatBot Arena, showcasing its ability to maintain high performance while efficiently utilizing resourcesFurthermore, the choice of Alibaba by "choosy Apple" serves as an endorsement of Alibaba’s AI capabilities and pushes the company’s AI ambitions into the spotlight.

The question remains, can the AI sector usher in a new cycle of value reassessment for Alibaba? Despite the stock uptick, it is crucial to note that Alibaba's share price in the US is still over $200 below its historic high reached in 2020. A close examination pre-rebound revealed that Alibaba’s Hong Kong stock price during the Lunar New Year was at a PE (price-to-earnings) ratio of merely 10 and a PB (price-to-book) ratio of 1.5, numbers that suggest a near-historic lowThis landscape hints that although Alibaba has prioritized cloud computing alongside its e-commerce business, the market valuation it receives has been tantamount to traditional retail enterprises.

The financial report for the third quarter of 2024 reflects a steady growth trajectory for Alibaba Cloud, with an overall revenue of 29.61 billion yuan—a year-over-year increase exceeding 7% and a quarter-on-quarter rise of 11.5%. The adjusted EBITA profit recorded was 2.66 billion yuan, registering an impressive 89% year-on-yearSignificantly, the report highlighted that the public cloud business fuels this growth, notably benefiting from the rising adoption of AI-related products which have achieved a triple-digit growth rate for five consecutive quarters.

Nonetheless, the revenue generated from Alibaba Cloud is still relatively dwarfed by its e-commerce counterpart, Tmall

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Although both divisions are positioned strategically as equal priorities, with the current expenditures on AI necessitating substantial financial resources, Alibaba Cloud's reach remains limited in the short termDuring this quarter, Tmall group generated around 99 billion yuan, constituting 42% of overall revenue, as opposed to Alibaba Cloud’s 12.5%. In the face of regulatory challenges and intense market competition, Alibaba Cloud has faced difficulties in maintaining a positive growth trajectory, suffering a decline from 84% growth in the 2019 fiscal year to 3% by 2023, only stabilizing at 3% growth in 2024.

As competitive pressures mount, so too does the uncertainty surrounding Alibaba’s AI growth prospectsRecent data from QuestMobile indicated that as of November 2024, only 2.91 million monthly active users were recorded on Alibaba's AI offerings, positioning it seventh amongst other applications—significantly lagging behind the popular Doubao, which commands 75.23 million active usersIn an effort to consolidate its AI offerings, Alibaba has folded its AI applications under one umbrella but must navigate complex inter-departmental coordination and realign its business modelThe pressure from the market creates an avenue for Alibaba to examine its approach to developing user-friendly AI solutions.

Looking broadly, Alibaba Cloud's value is becoming increasingly prominent, hinting at the potential for a dramatic re-evaluation but highlighting the necessity for Alibaba to nurture this "second growth curve." Could we soon witness the emergence of an opportune "window"? With lush growth in sentiment towards innovation in the Chinese tech landscape, exemplified by the success of models like DeepSeek, market confidence in Chinese tech stocks is beginning to rise.

Beyond Alibaba, several other technology companies in China have also experienced stock price increasesCompanies like Xiaomi and Tencent saw gains of over 7.5% and 6.5%, respectively

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Morgan Stanley has recently indicated that many investors still operate under traditional valuation perspectives of Chinese tech entities, failing to encompass their cutting-edge advancements adequately.

The emergence of innovative products such as DeepSeek is further mitigating the constraints that have historically hampered China's AI developmentInvestors are gradually realizing that China’s journey into AI does not necessarily hinge on massive capital inputsEven amidst a constriction of high-end GPU supplies, the fundamental potential for technological progression remains intactWith robust human resources for engineering, abundant data, and mature networks, China is well-placed to accelerate its AI endeavors, reflecting a broader shift in investment logic.

Unlike previous narratives that focused on cost-cutting and efficiency, the vibrant development of AI technologies is prompting a fresh wave of investment in innovative Chinese enterprisesAs confidence in AI technologies grows, there is an expectation for a self-reinforcing cycle that bolsters the sector’s growth.

Economics professor Zheng Zhigang from Renmin University comments on the evolving investment landscape, highlighting how the scarcity of opportunities is elevating the value of AI technologiesHe posits that as established companies delve deeper into AI, there may emerge a reciprocated relationship where capital markets benefit from advancements in AI technologies, giving rise to sustainable development.

While investing in innovation carries inherent risks, the successful integration of AI into traditional business models will challenge corporations to refine their management capabilities, maximizing internal innovationsZheng highlights that companies should focus on delivering robust business models, allowing the capital markets to adjust their valuations accordingly.

As Alibaba prepares to release its financial earnings on the 20th, observers are keenly interested in whether the anticipated capital expenditure will approach the 100 billion yuan mark

In Q3 2024, the group reported capital expenditures of 17.49 billion yuan, marking a whopping 239.4% year-on-year increase, chiefly directed towards investments in cloud computing resources.

The competitive landscape remains fierceAfter a year of bolstered capabilities in AI, ByteDance has publicly declared ambitions aimed at achieving breakthrough intelligence thresholds by 2025. This divergence from focusing purely on specific growth metrics emphasizes a broader ambition for intelligence itselfMeanwhile, Baidu remains committed to investing heavily in cloud infrastructure, indicating that major players are beginning to recognize the potential for growth and innovation within China's AI market, fueling new ambitions among tech enterprises.

Excitement for AI applications is also stimulating innovation across sectorsAccording to recent metrics, DeepSeek generated an impressive 256 million monthly visitors in January, eclipsing competitors and marking a substantial engagement within the marketCompanies embracing AI, such as Kuake’s recent rebranding as an “all-encompassing AI assistant”, are also gearing towards appealing to younger demographics, promoting the technology across vibrant user bases.

This surge in enthusiasm has broadened engagement across various sectors with evidence of expanding markets for B2B applications for large modelsYet, challenges remain; C-end users in China still grapple with a lack of payment maturity, and extracting viable commercial applications for B2B models remains another hurdleHowever, the excitement generated around new launches suggests that the Chinese market is increasingly positioned for growth in AI applications.

As more investors re-evaluate the valuation frameworks applied to Chinese tech companies, a new growth "window" is openingThis shift heralds an exciting chapter for investment in AI where competition is set to intensify, presenting fresh opportunities for expansion and innovation.

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