Alibaba shares rally on reports of AI partnership with Apple

Alibaba shares (NYSE: BABA) are trading higher in US premarket price action today amid reports that Apple is partnering with Alibaba for artificial intelligence (AI). Apple currently does not offer its AI features in China and the partnership could be win-win for the two companies.

Last year, Apple selected Chinese tech giant Baidu for AI partnership but the company’s progress fell short of what Apple was looking for. The Information reported that Apple also considered TikTok-parent ByteDance, Tencent, Alibaba, and DeepSeek, for AI partnership but eventually zeroed in on Alibaba.

Chinese AI shares rally amid AI euphoria

Notably, while the rally driven by AI euphoria has subsided in the US markets, we have seen some upward price action in Chinese AI plays over the last few weeks after Chinese startup DeepSeek said that it developed an AI model for less than $6 million. The model offers a much better value proposition as compared to those from US giants like OpenAI which spent billions of dollars developing their AI models.

“The emergence of DeepSeek has sparked a new AI-related catalyst for Chinese tech stocks,” said Andy Wong, investment and ESG director for Asia Pacific at Solomons Group. He added, “Within this space, we see Alibaba as having more tangible and well-established earnings growth prospects in the medium term.”

DeepSeek’s AI model also raises doubt over the dominance of US tech giants in AI models. Incidentally, the US barred exports of Nvidia’s high-end AI chips to China over concerns that they might also be used for military purposes. However, DeepSeek managed to achieve the feat despite US sanctions. We saw something similar with Huawei which not only survived US sanctions but has now emerged as Apple’s biggest competitor in the Chinese market.

Apple has been losing market share in China

Apple has been gradually losing market share in China as domestic smartphone companies, especially Huawei whose business suffered a near-death blow due to the US sanctions, have come up with attractive offerings. Huawei recently cut prices in China post which Apple was also forced to offer discounts in the country.

Last year, Apple began rolling out Apple Intelligence features that it had unveiled during the Worldwide Developer Conference (WWDC) in June. These artificial intelligence (AI) features were expected to spur iPhone sales but so far, we haven’t seen a major bump.

Apple has lost market share in China

Meanwhile, during their fiscal Q1 2025 earnings call last month, Apple said that iPhone 16 sales have been strong in markets where it is offering Apple Intelligence features. However, Apple is currently not offering these features in China due to regulatory issues. The unavailability of Apple Intelligence features was among the reasons Apple lost its position as the largest smartphone company in China.

China has been quite protective of the data of its citizens. It has banned government employees from using Apple’s iPhone and the Cupertino-based company removed Meta Platforms’ apps from the Chinese App Store last year on orders from the government. Meta’s apps like WhatsApp and Threads were anyways mostly inaccessible to Chinese users but Apple removing them from the App Store makes it even tougher to access these apps in the country.

Partnership with a Chinese tech company might be the first step towards Apple rolling out its AI features in China – its biggest market outside the US.

Morgan Stanley on Apple-Alibaba partnership

Morgan Stanley has reiterated Apple as an overweight amid reports of it partnering with Alibaba. “If confirmed, we would view this as a critical catalyst for Apple’s competitive standing in China. … .Could a potential Alibaba AI partnership help solve Apple’s China smartphone problem? Yes, it could, in our view,” said the brokerage in its note.

The overall Street sentiment towards AAPL has been subdued though and three brokerages downgraded the share last month. Among them was Moffett Nathanson which downgraded the share from “neutral” to “sell” while slashing the target price from $202 to $188. In his note, analyst Craig Moffett said, “As great a company as Apple is, the outlook for Apple’s shares, given this challenging backdrop, is, unfortunately, decidedly unattractive.” He added, “A valuation that was already rich got richer, even as the rationale for why it was rich has taken on water.”

US-China tensions are a risk for Apple

Growing US-China tensions are a potential risk for Apple investors. US-China relations which are anyways at the lowest level in decades are set to deteriorate further as President Donald Trump has gone ahead with the tariffs as he threatened. For Apple, China is a major market and also a sourcing hub. In the past also, the company has faced boycott calls in China. However, it downplayed the risks and said that it did not have a material impact on sales. While Apple has been trying to diversify its supplier base after the US-China trade war, the company still heavily relies on Chinese suppliers.

During the recent earnings call, Apple dodged questions over its supply chain strategy in light of Trump’s tariff threat.

Alibaba shares rally amid AI wave

Meanwhile, Alibaba shares which have been out of favor with investors since late 2020 when China cracked down on the company, have rallied this year. In their note, JPMorgan Chase & Co. analysts including Alex Yao wrote “Many hedge funds and long-only investors see AI as a potential inflection point for Alibaba, with some expressing interest in understanding the valuation of Alibaba’s cloud business and any upside from large language models.” They added, “The AI narrative is seen as a driver for potential re-rating, but there are concerns about the monetization of AI capabilities.”

Notably, Alibaba shares plummeted in the first half of 2024 but recouped their losses in the back half after China’s stimulus triggered a rally in Chinese share markets. While the stimulus-driven rally faded shortly, AI euphoria seems to have caught up with Chinese tech shares.

Some analysts find Chinese tech shares still undervalued despite the recent rally. According to Manish Bhargava, chief executive officer at Straits Investment Management in Singapore “Despite the rally, Alibaba’s stock is still undervalued compared to its US tech peers, considering its growth potential and market position.” He added, “The company is expanding its overseas marketplaces, which could reduce its reliance on the domestic Chinese market and drive future growth.”

Alibaba shares have gained 46% from their 2025 lows and look set to further add to their rally amid reports of the Apple partnership.