AI Cloud Leadership And Expanding E Commerce Ecosystem Will Drive Significant Long Term Upside

Catalysts

About Alibaba Group Holding

Alibaba Group Holding operates a diversified digital ecosystem spanning e-commerce, cloud computing, AI infrastructure and local consumer services.

What are the underlying business or industry changes driving this perspective?

• Explosive enterprise adoption of AI workloads is driving sustained triple digit growth in AI products and 34 percent cloud revenue expansion. This positions Alibaba Cloud to compound high margin infrastructure and platform revenue as GPU capacity scales and supply constraints ease, supporting long term earnings growth.
• Alibaba's leadership in China's AI cloud market, with a market share larger than the second to fourth providers combined and a full stack model from infrastructure to applications, creates high switching costs and pricing power that should support structurally higher cloud margins and cash flow over time.
• The rapid uptake of the Qwen app, exceeding 10 million downloads in the first week, and its planned integration across e-commerce, maps and local services, creates a unified AI entry point that can deepen user engagement, lift take rates and drive higher advertising and transaction based revenue.
• Strategic reinvestment into quick commerce and on demand retail is already halving per order losses while expanding GMV and user frequency. This is setting the stage for operating leverage and improving unit economics that can meaningfully expand China e-commerce EBITA and overall net margins as the business matures.
• Large scale AI and cloud CapEx, backed by USD 41 billion in net cash and persistent industry undersupply of compute, should translate into durable capacity led growth, higher token based utilization and a rising mix of AI services in the revenue base, supporting multi year revenue acceleration and margin expansion.

Assumptions

This narrative explores a more optimistic perspective on Alibaba Group Holding compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Alibaba Group Holding's revenue will grow by 12.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 12.4% today to 15.1% in 3 years time.
• The bullish analysts expect earnings to reach CN¥219.7 billion (and earnings per share of CN¥91.35) by about December 2028, up from CN¥125.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥154.1 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 24.3x on those 2028 earnings, up from 20.0x today. This future PE is greater than the current PE for the US Multiline Retail industry at 19.7x.
• The bullish analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.28%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Alibaba is committing to an aggressive multi year AI infrastructure build out, with management indicating that the previously planned RMB 380 billion in CapEx over three years may prove insufficient. If actual AI demand or monetization falls short of expectations, this elevated investment cycle could weigh on returns on invested capital and structurally depress earnings and free cash flow.
• The strategy of reinvesting heavily in quick commerce to gain market share, evidenced by a 78 percent decline in total adjusted EBITA, a 53 percent fall in GAAP net income and free cash flow turning into a RMB 21.8 billion outflow, may fail to deliver sustainable unit economics. This would keep group level net margins and earnings under prolonged pressure.
• Management repeatedly highlights intense competition in China e commerce and quick commerce and signals that investment levels will be dynamically adjusted in response. This suggests that maintaining user and GMV growth may require ongoing subsidies and higher marketing spend, limiting future operating leverage and constraining improvements in CMR growth, EBITA and overall profitability.
• The cloud and AI businesses depend on a global supply chain that is currently undersupplying key components across fabs, DRAM, storage and CPUs. If these bottlenecks persist longer than expected, Alibaba may be unable to deploy sufficient servers to meet demand, capping cloud and AI revenue growth while fixed cost absorption drags on segment margins and consolidated earnings.
• As AI models become more powerful and token usage expands across internal products like Amap, Taobao and Qwen and external enterprise workloads, there is a risk that unit economics deteriorate if pricing power weakens or cost per token does not fall as fast as compute and energy requirements rise. This could limit the expected margin expansion in Cloud Intelligence and reduce group level earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Alibaba Group Holding is $248.57, which represents up to two standard deviations above the consensus price target of $197.5. This valuation is based on what can be assumed as the expectations of Alibaba Group Holding's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $258.77, and the most bearish reporting a price target of just $123.37.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be CN¥1455.7 billion, earnings will come to CN¥219.7 billion, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of $158.82, the analyst price target of $248.57 is 36.1% 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.