Rating: BUY | 12-M Price Target: $185 | Upside: +70% | Current Price: $110

Big Picture

Alibaba is currently rated a buy with a price target of $185. This represents a ~69% upside to current share price. Long story short Alibaba generates solid cash from its e-commerce operations and their cloud business/AI (Alibaba Cloud/Qwen Models) has been growing rapidly and will continue to grow substantially in future. Currently the company is pouring cash into AI Data Centers which has caused earnings to decrease but we believe these investments will generate substantial returns down the line. Stock price has fallen significantly after Alibaba raised $10.2B through equity sales to fund this AI initiative which has scared many investors. We believe this is an attractive opportunity to get long on the stock.

What does Alibaba Do?

As mentioned above Alibaba recently broke down it's business into 4 different categories. One is there E-commerce group which consists of their main retail sites Taobao/Tmall as well as quick commerce services and their global e-commerce business (ie. Aliexpress). Second is AI Cloud and Compute. This is made up of Alibaba Cloud (Compute rental for enterprises) and their chip manufacturing division T-Head. Third is AI Labs & Applications which contains their Qwen model suite, enterprise AI tool called QwenWork and their consumer facing AI chat app. Finally All Others which includes their Logistics company Cainiao, Ele.me/Amap and Entertainment business.

Alibaba will have multiple AI initiatives working hand in hand to fuel growth. With there Qwen models that they have opened up to be free, they have also built a product called PAI which allows companies to develop their own AI products on top of Alibaba Cloud. They also have there own AI Chips which allows them to not rely on Nvidia which has restricted chip sales to China.

We feel that breaking the business out like this will be beneficial to investors. As we can begin to see how much money Alibaba is losing on AI initiatives and how much money their cloud business is generating. While this may depress earnings in the near term we believe this will allow investors to better understand what is driving Alibaba's growth.

Latest Numbers

For the last 4 quarters reported Alibaba has seen single digit revenue growth and earnings have fluctuated due to new accounting methods and investment into AI. One area to note is Alibaba Cloud. Their cloud business grew 38% y/y to 45% y/y in the most recent quarter. This is the highest growth Alibaba Cloud has seen in over 5 years. With AI products making up around 1/3 of there external customer revenue.

However Alibaba has increased their capex spend significantly. Up 75% y/y in the most recent quarter and 47% for the full fiscal year. This has led to negative Free Cash Flow generation compared to the previous year. In order to raise more cash to invest in their AI Data Centers they sold $10.2B of equity in August 2026. This is the largest equity sale in HK history and will be used solely to invest in their AI business.

We don't believe that earnings have declined dramatically because their e-commerce business is deteriorating. We believe this is more due to Alibaba increasing their investment into AI initiatives. However we will have to watch if these investments start to show results with external customers in the near term.

Growth Drivers

As stated before Alibaba Cloud has grown to become Chinas leading AI cloud service. With around 38% market share in China. Their Qwen models are particularly strong with enterprises looking to build out their own AI applications. Currently taking around 1/3 of the market and have overtaken competitors such as Deepseek and ByteDance Doubao. Consumer applications have lagged behind with Doubao far surpassing Alibaba in user base. However by offering there models for free Alibaba can attract developers who then purchase compute from Alibaba Cloud.

They have also been able to gain market share in their Quick Commerce offerings. Currently growing over 45% y/y as they compete against Meituan and JD.

We feel that Alibaba will continue to dominate in China with their AI Cloud offering. The only question is how soon external customers will start adopting there services. We expect this to occur around 2028 but this is just our estimate.

Cash/Balance Sheet

Alibaba continues to hold a substantial amount of cash on their balance sheet. After selling $10.2B in equity their cash has decreased slightly. But they were able to avoid taking on additional debt. One thing to note is that Alibabas Chairman Joe Tsai and CEO Eddie Wu purchased $15M of equity after their stock price declined. Which shows they believe in the companies future. Alibaba currently pays a small dividend and have slowed their share buybacks to invest in their AI initiatives. Softbank no longer holds any equity in Alibaba after selling all there shares in 2024.

Valuation vs Peers

When looking at Alibaba's peers in China (PDD/JD/Metuan) Alibaba commands a higher multiple. However we think this is justified with there Cloud growing 45% y/y. Comparable to Amazon (AWS) at 37% and nearing Microsoft (Azure) at 43%. Although Alibaba Cloud is much smaller in scale than these competitors.

Risk Factors

There are multiple risks when investing in Alibaba. First Alibaba Cloud is still small compared to US competitors. Second their spending has depressed cash flow. There are also concerns that US may further restrict chip sales to China. Continued competition in E-commerce and regulation from Chinese and Overseas Governments.

Conclusion

We believe Alibaba is a good opportunity for investors that can stomach short term volatility. And want exposure to both E-commerce and AI/Cloud. We would recommend holding this name for at least 1-3 years as we believe their AI initiatives will take some time to show returns. Can hold as a core China Internet holding and as an AI play.