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What exactly is DeepSeek, and why is it significant? DeepSeek, a Chinese AI company focused on developing large language models (LLM), has recently caught the eye of the tech world by claiming that its cutting-edge AI model rivals that of OpenAI’s GPT-4. This announcement by DeepSeek marks a major achievement for the Chinese tech sector, suggesting that Chinese firms are capable of creating top-tier AI models. Interestingly, DeepSeek asserts that it achieved this feat using less advanced chips, as the most advanced ones are currently inaccessible due to trade restrictions. Notably, they claim to have accomplished this at a fraction of the cost compared to their Western counterparts.
The success of DeepSeek, beyond its own accomplishments, hints at the potential within the Chinese AI industry. As investors reassess opportunities in the Chinese tech space, companies like Alibaba (NYSE: BABA) could stand to gain significantly. Alibaba, a well-established and profitable tech giant, is strategically positioned to benefit from the growth of the AI industry, which presents a massive value creation opportunity. According to Statista, the AI market could reach $827 billion by 2030.
However, many investors may overlook the substantial capital investment required to succeed in this competitive landscape. The race to develop cutting-edge AI technology demands heavy investments in data centers, AI model training, and ongoing research and development, necessitating companies to have deep pockets to invest billions annually over several years before reaping rewards. For instance, Meta Platforms recently announced plans to invest $60 billion to $65 billion in capex by 2025 to drive its AI ambitions.
Fortunately, Alibaba possesses the financial resources essential for long-term heavy investments. As the largest e-commerce platform in China, generating substantial profits annually, Alibaba is well-equipped to allocate significant funds towards AI initiatives. In the fiscal year 2024, Alibaba generated $22 billion in free cash flow and held a net cash position of $62 billion, showcasing its financial strength. Additionally, Alibaba has access to top talent and cutting-edge technology in China, facilitated by its ownership of Alibaba Cloud, providing the necessary resources to fuel its AI endeavors.
Alibaba’s strategic position for long-term AI success is further bolstered by its cloud computing business. With a dominant 39% market share in cloud services, Alibaba Cloud boasts the most extensive and cost-efficient cloud infrastructure in China, crucial for developing and deploying advanced AI technologies like machine learning and generative AI. Its leading position in the cloud industry offers a vast customer base for testing and innovating with new AI solutions, giving it a competitive edge over AI start-ups struggling to gain traction with established companies.
Additionally, Alibaba’s diverse business ecosystem offers numerous use cases and data sources for training and enhancing its AI models. Leveraging AI across its e-commerce operations in areas such as customer service, logistics, and product recommendations, Alibaba
Technologies, whether in cloud computing AI services, AI in e-commerce, or fintech (Ant Group), are propelling Alibaba towards victory in the competitive AI race. As a result, Alibaba offers investors a secure avenue to ride the wave of the AI trend. The significance of AI cannot be overstated, as it is set to revolutionize every industry and company in its path. However, identifying a reliable AI company to invest in poses a challenge. Established giants like Palantir and Nvidia command high valuations, while smaller players such as C3.ai struggle with profitability. In contrast, Alibaba stands out as a rare find – already profitable and primed to capitalize on the burgeoning AI trend. Moreover, Alibaba boasts an attractive valuation, with a price-to-sales ratio of just 1.9 times, a stark comparison to Palantir’s lofty PS ratio of 94.4 times. Holding Alibaba stock not only assures investors of a good night’s sleep but also positions them to reap the rewards of the AI boom without exposing themselves to unnecessary risks.
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