Should Investors Hold or Fold BABA Stock at a P/S Multiple of 2.58X?

Alibaba Group BABA finds itself at a precarious crossroads as 2025 approaches, with its price-to-sales multiple of 2.58 times offering little comfort to investors questioning whether the Chinese e-commerce giant can recapture its former glory. While this valuation metric might appear modest compared to certain growth-oriented technology companies, the underlying fundamentals paint a troubling picture that suggests shareholders should seriously consider exiting their positions before market sentiment deteriorates further.

Disappointing Growth Trajectory Signals Structural Challenges

The Zacks Consensus Estimate for fiscal 2026 revenues is pinned at $144.68 billion, suggesting 4.73% year-over-year growth that falls dramatically short of expectations for a company once synonymous with explosive expansion in the world's second-largest economy. This tepid revenue projection reflects mounting headwinds, including intensifying domestic competition, regulatory pressures, and a broader economic slowdown in China that shows no signs of abating. Even more concerning is the anticipated earnings decline, with the Zacks Consensus Estimate for fiscal 2026 pointing toward $6.57 per share, marking a troubling 27.08% year-over-year decrease that underscores operational challenges extending beyond mere top-line stagnation.

Management's acknowledgment of persistent macroeconomic uncertainties and consumption weakness in China suggests that near-term catalysts for meaningful acceleration remain elusive.

Furthermore, recent AI initiatives, while potentially promising in the long term, require substantial capital investment during a period when profitability is already under pressure, creating an unfavorable risk-reward dynamic for shareholders seeking immediate returns. Alibaba's commitment of $52 billion over three years for AI infrastructure development reflects recognition that model innovation alone cannot drive sustainable competitive advantage. The strategic shift to self-developed AI training chips, partially replacing Nvidia hardware, addresses both cost optimization and supply chain resilience amid ongoing U.S. export restrictions. This semiconductor independence initiative, while requiring substantial upfront investment, could prove prescient as geopolitical tensions continue reshaping global technology supply chains.

Alibaba Group Holding Limited Price and Consensus

Alibaba Group Holding Limited price-consensus-chart | Alibaba Group Holding Limited Quote

Premium Valuation Unjustified Amid Deteriorating Fundamentals

Alibaba continues to trade at a premium valuation with a Value Score of D. The market has priced in the upside of AI, while underestimating the execution risks and capital intensity required for meaningful transformation. 

The stock's forward 12-month price-to-sales ratio of 2.58 times actually trades at a premium compared to the Zacks Internet-Commerce industry average of 2.23 times, exposing a troubling disconnect between market pricing and fundamental performance. This valuation premium appears entirely unjustified given Alibaba's decelerating revenue growth and contracting earnings, suggesting the market has yet to fully recalibrate expectations downward to reflect the company's diminished prospects.

BABA Trades At a Premium P/S F12M

Competitive Disadvantage in AI Race Becomes Increasingly Apparent

Alibaba's stock has returned 54.1% over the past six months pales in comparison to the explosive gains captured by other companies successfully monetizing artificial intelligence capabilities. Amazon AMZN has leveraged its cloud computing dominance through AWS to establish formidable AI infrastructure advantages, while Amazon's e-commerce operations benefit from sophisticated machine learning algorithms that enhance customer experience. Microsoft MSFT has seamlessly integrated AI across its enterprise software portfolio, with Microsoft Azure becoming the preferred platform for corporate AI deployments and Microsoft's partnership with OpenAI providing unmatched access to cutting-edge large language models. Alphabet GOOGL-owned Google continues pushing boundaries in AI research and commercialization, with Google Cloud gaining market share and Google's advertising business utilizing AI for superior targeting capabilities. Each competitor appears better positioned than Alibaba to capitalize on the transformative potential of artificial intelligence, leaving the Chinese giant struggling for relevance in the technology industry's most important growth vector.

BABA’s 6-Month Performance

Conclusion

Investors seeking growth should look elsewhere rather than hoping Alibaba can successfully navigate its mounting challenges while simultaneously funding an expensive AI transformation. The risk-reward profile simply doesn't justify maintaining exposure to this deteriorating situation. BABA stock currently carries a Zacks Rank #5 (Strong Sell). 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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