JPMorgan's latest research report argues that the pace of profitability improvement in Alibaba (BABA)'s cloud business is surpassing market expectations, with AI investment potentially achieving internal self-sufficiency ahead of schedule, and the company's profit structure set to reach a critical inflection point in the quarter ending December 2026.
According to a report published on October 11 by the team led by analyst Yao Cheng at JPMorgan Securities (China), Alibaba's cloud business EBITA is expected to exceed the operating losses of AI models and applications for the first time in the quarter ending December, meaning cloud business growth will begin to make a positive contribution to the group's overall profitability. JPMorgan views this inflection point as "the first key data point for return on AI invested capital" and the core market focus for the stock over the next one to two quarters.
Although JPMorgan cut its target price for Alibaba's US-listed shares from $210 to $200 (and its Hong Kong-listed target from HK$205 to HK$195), it simultaneously raised its valuation multiple from 16x to 17x, citing the approaching cloud and AI combined EBITA inflection point that effectively reduces uncertainty around the profit trajectory, while maintaining an "overweight" rating.
Q4 turning point: cloud profit to cover AI losses for the first time
The core thesis of the report is that Alibaba's cloud business profit growth is catching up to and will surpass the ongoing losses on the AI research and development side.
The report estimates that in the quarter ending September 2026, Alibaba's AI lab and application EBITA losses will be approximately RMB 10.6 billion, with the cloud business EBITA margin rising from 11.6% in the prior quarter to 12.4%, but the combined cloud and AI lab EBITA will remain slightly negative.
The key shift is expected to occur in the quarter ending December: JPMorgan forecasts that cloud revenue year-on-year growth will exceed 55% by then, with cloud margins breaking through 15%, turning the combined cloud and AI lab EBITA positive. This means AI operating losses will be absorbed within the segment without relying on external equity financing. The report explicitly states that it does not expect the company to conduct any further equity financing this fiscal year.
Market expectation gap: JPMorgan's EBITDA forecasts significantly above consensus
There is a significant divergence between JPMorgan's forecasts and market consensus, which forms an important pillar of its bullish thesis.
According to the report data, JPMorgan's forecast for Alibaba's FY27 (ending March 2027) non-GAAP EBITDA is RMB 193.2 billion, 14% above market consensus; its FY28 forecast is RMB 290.9 billion, 30% above consensus. JPMorgan believes that market consensus has neither fully accounted for the profit inflection point in the quarter ending December nor incorporated expectations of over 50% cloud growth in FY28, the latter being the primary reason its FY28 EBITDA forecast leads the market by such a wide margin.
At the same time, JPMorgan cut its FY27/FY28 total revenue forecasts by 2% and 6% respectively, and reduced its FY27/FY28 non-GAAP earnings per share forecasts by 9% and 10% respectively, mainly due to lowered revenue forecasts for non-cloud segments and a minor adjustment to the cloud revenue calculation framework.
Cloud growth logic: infrastructure investment brings near-term depreciation pressure
The report also elaborates in detail on the structural challenges and long-term potential facing the cloud business profitability path.
The report notes that the longer infrastructure build-out cycle will generate depreciation before utilization ramps up, dragging on first-year cloud revenue - on the one hand, capacity is waiting to be put into use, and on the other, cash used to increase computing power leads to reduced interest income. JPMorgan emphasizes that depreciation is a real cost, and shareholder returns ultimately depend on return on assets, cost of capital, and the economic benefits retained by Alibaba.
Over the long term, JPMorgan believes that as subsequent infrastructure investments gradually mature, cloud business margins are expected to rise to around 20% over time. The report estimates that cloud revenue in the quarter ending September will grow approximately 53% year-on-year, with further acceleration in the quarters ending December and March.
E-commerce business: competitive pressure easing at the margin, instant retail losses narrowing sharply
In the e-commerce segment, JPMorgan expects Taobao/Tmall EBITA in the quarter ending September to be flat year-on-year, an improvement from the 3% year-on-year decline in the quarter ending June, which it views as a sign of slightly reduced competitive intensity.
In instant retail, JPMorgan estimates losses for the quarter at approximately RMB 9.2 billion, far below the RMB 35 billion from a year earlier. The report believes that as a higher proportion of high-value products drives up average order value, losses in this segment are expected to narrow further without sacrificing market share.
JPMorgan expects comparable customer management revenue (CMR) to grow approximately 1% year-on-year, roughly flat versus the prior quarter, with the growth gap between CMR and EBITA narrowing to about 1 percentage point, consistent with a trend of margin stabilization rather than further deterioration.
On valuation, JPMorgan adjusted its target price for Alibaba's US-listed shares to $200 (as of June 2027), based on 17x FY28 forward earnings, which is the valuation multiple for "China internet tier-one assets." The Hong Kong-listed target price was correspondingly adjusted to HK$195. The valuation multiple was raised from 16x to 17x, reflecting reduced earnings-path risk from the approaching cloud and AI combined EBITA inflection point.
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