AI And Cloud Investments Will Improve Future Offerings With Qwen25-MAX

Key Takeaways

• Alibaba's AI and cloud focus is driving substantial revenue growth and positioning for future earnings acceleration due to strong product demand.
  
• Strategic divestments and e-commerce enhancements aim to stabilize market share and bolster long-term earnings and shareholder returns.
  
• Alibaba's investments in AI and cloud, strategic refocus, and competitive challenges could pressure profitability, impacting margins and revenue growth amid intense market dynamics.

Catalysts

Through its subsidiaries, provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses to engage with their users and customers in the People's Republic of China and internationally.

• Alibaba Group's ongoing AI and cloud strategy is set to drive future revenue growth, with AI-related product revenue maintaining triple-digit year-over-year growth for six consecutive quarters, primarily impacting cloud business revenue.
  
• The introduction of new AI models, such as Qwen2.5-MAX, anticipates further acceleration in cloud revenue growth as customer demand continues to surge, leading to potential improvements in Alibaba's overall earnings.
  
• Investments in infrastructure for AI and cloud computing are expected to exceed those of the past decade within the next three years, providing a foundation for long-term revenue growth and potentially enhancing net margins through operational efficiencies.
  
• Domestic and international e-commerce, particularly through platforms like Taobao and Tmall, are focusing on improving user experience and merchant operations, which could stabilize market share and enhance revenue and net margins.
  
• Alibaba's strategic divestment from non-core assets, alongside share buybacks and financial management measures, aims to improve operating efficiency and shareholder returns, which may contribute to long-term earnings growth.

Alibaba Group Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alibaba Group Holding's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.3% today to 14.7% in 3 years time.
• Analysts expect earnings to reach CN¥168.7 billion (and earnings per share of CN¥72.31) by about April 2028, up from CN¥120.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥186.3 billion in earnings, and the most bearish expecting CN¥120.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.7x on those 2028 earnings, down from 18.1x today. This future PE is greater than the current PE for the US Multiline Retail industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 4.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.31%, as per the Simply Wall St company report.

Alibaba Group Holding Future Earnings Per Share Growth

Risks

• Alibaba's focus on AI and cloud infrastructure investment over the next three years, which will exceed past decade expenditures, suggests high capital outlay that may pressure profit margins due to depreciation of new resources, impacting profitability.
  
• Increased investment in user experience and acquisition on domestic e-commerce platforms (Taobao and Tmall) while improving monetization may not immediately yield equivalent revenue growth, potentially affecting net income due to an imbalance between revenue and costs.
  
• AIDC's international e-commerce business is not yet profitable, with continued investment needed in key markets to acquire users, posing risks to short-term profitability and suggesting prolonged losses that may impact operating income.
  
• Alibaba’s strategic shift in focus from non-core businesses to core operations, such as divesting retail assets like Intime and Sun Art, may streamline operations but risks losing diversification in business revenue streams.
  
• Intense competition in China’s AI and cloud markets, coupled with homogenizing differences between cloud models, may lead to pressure on cloud margins over the long term as competitive pricing becomes crucial for acquiring and maintaining market share.

Valuation

• The analysts have a consensus price target of $163.573 for Alibaba Group Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $190.28, and the most bearish reporting a price target of just $85.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥1145.3 billion, earnings will come to CN¥168.7 billion, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 8.3%.
• Given the current share price of $132.7, the analyst price target of $163.57 is 18.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.