Alibaba’s Strategic Pivot: Unlocking Value in AI and Semiconductors

Alibaba Group is steering its growth narrative into a new chapter, with a dual focus on unlocking embedded value and securing technological leadership. The confirmation of plans to list its semiconductor unit, T-Head, alongside regulatory approval to access Nvidia's latest AI chips, are central to this shift. However, as some major investors use a recent rally to rebalance portfolios, the central question remains: can the Chinese giant translate its ambitious AI and semiconductor vision into tangible financial results in the medium term?

A significant development for Alibaba's competitive stance in artificial intelligence has emerged from the regulatory sphere. Chinese authorities have granted the company, along with peers Tencent and ByteDance, approval to prepare orders for Nvidia's high-performance H200 AI processor. This move alleviates a portion of the uncertainty surrounding access to cutting-edge hardware crucial for AI development.

Reports indicate that Chinese clients have already placed orders for over 2 million H200 units, with each chip carrying a price tag of approximately $27,000. This hardware access is pivotal for the aggressive AI offensive spearheaded by CEO Eddie Wu, who has committed to investing $53 billion in AI and related infrastructure. The strategic importance is twofold: it bolsters the competitiveness of Alibaba's cloud computing division and is essential for training and operating its proprietary large language model, Qwen. This development reinforces the company's broader narrative of evolving beyond its e-commerce roots into a formidable cloud and AI contender.

The T-Head IPO: A Potential Value Catalyst

Concurrently, internal restructuring is taking shape with the planned initial public offering of its chip design arm, T-Head. Alibaba is preparing a reorganization that includes an employee stock ownership scheme ahead of the listing, signaling an intent to clearly delineate this business unit and position it independently in the capital markets.

Should investors sell immediately? Or is it worth buying Alibaba?

Market experts, including analysts at JPMorgan, estimate a wide potential valuation range for T-Head between $25 billion and $62 billion. This broad spectrum highlights both the uncertainty regarding its future profitability and market position, as well as the significant latent value within Alibaba's conglomerate structure when assessed on a sum-of-the-parts basis. Currently, parts of the semiconductor business may be obscured by a conglomerate discount applied to the parent company. A separate listing could surface this "hidden" value, though a key cited risk remains T-Head's ongoing heavy dependence on Alibaba. Investors are advised to temper short-term expectations, as the IPO timeline extends beyond the next twelve months.

Divergent Moves in the Investor Landscape

The positive news flow has been met with mixed reactions from institutional investors. On one hand, the Norwegian fund Skagen reduced its stake in Alibaba, shifting capital into rival JD.com. This rotation indicates that some large investors are capitalizing on the preceding share price rally to realize gains and reallocate within the Chinese e-commerce sector.

Conversely, fresh analyst support has emerged. Research firm Arete Research upgraded Alibaba from "Neutral" to "Buy," issuing a price target of $190. The overall market consensus remains moderately positive, with average price targets around $190 suggesting a double-digit upside potential from current levels. On the German market, the share price recently moderated after a prior advance, closing at €147.20 on Friday, a daily decline of 3.54%. Despite this, the stock maintains a substantial gain of nearly 78% over a 12-month horizon.

The Path Forward: Execution is Key

Looking ahead, the near-term trajectory for Alibaba's shares hinges on two primary factors: the concretization of plans for the T-Head spin-off and unimpeded access to the ordered Nvidia chips without new geopolitical obstacles. Operationally, focus now turns to February 19, when the company is scheduled to report earnings for the third quarter of its fiscal year. Analysts anticipate revenue of $40.95 billion and earnings per share of $1.91. Should Alibaba surpass these expectations and simultaneously demonstrate initial progress in monetizing its substantial AI investments, the market is likely to reassess its current valuation and the potential embedded in the T-Head separation.