To The Moon

Summary

• Alibaba's cloud and AI business shows strong long-term growth and profitability, with the AI segment growing triple digits for six consecutive quarters.

• The cloud business posted double-digit growth in 3Q25, and Alibaba continues to invest aggressively in this segment.

• Alibaba's prudent capital allocation strategy includes share repurchases, benefiting shareholders and reinforcing my Buy rating.

• I reiterate my Buy rating on Alibaba with a target price of $183, driven by its robust cloud and AI business growth.

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Recap of Previous Article on BABA

Our previous coverage of Alibaba Group (NYSE:BABA) was back in October 2023. We highlighted to readers the growth prospects attached to its international retail business, with a Buy rating. Since then, the stock is now up a whopping ~63%.

In this follow-up article, I will focus on BABA’s cloud and AI business that is very promising in terms of long-term growth and profitability. I continue to remain bullish on the stock.

Investment Summary

BABA is a leading e-commerce player and provider of cloud computing services. The company is focused on three segments – domestic and international e-commerce, cloud computing and AI and internet platform businesses.

The cloud business is witnessing strong traction and posted double digit growth in 3Q25. Moreover, the AI business has grown in triple digits for the sixth consecutive quarter. The company continues to invest aggressively in the cloud business and is well positioned to tap the growth opportunities that come with AI. BABA also has a prudent capital allocation strategy focused on share repurchases that will benefit its shareholders. Summarily, I have a Buy rating on the stock and a target price of $183.

Cloud Intelligence Group – Jewel in the Crown

BABA has two core businesses – e-commerce and Cloud + AI. During 3Q25, the topline for the cloud business grew by 13% and adjusted EBITA jumped by 33%. Moreover, the AI related business clocked triple digit YoY growth for the sixth consecutive quarter. Meanwhile, the Chinese e-commerce business delivered just 2% EBITA growth and AIDC reported EBITA losses.

BABA is now the fourth largest provider of cloud business globally and the largest in Asia. The business continues to see strong traction and has won several industry awards. The cloud business is recognized as a leader by Gartner for both Container Management and Cloud Database Management Systems. Moreover, the company was recognized as a leader by Forrester.

Driven by AI applications, the growth prospects for the cloud business remains promising. The latest version of BABA's flagship AI model, the Qwen 2.5-Max, was recently launched and boasts industry-leading performance. More than 90,000 Qwen based models have been deployed worldwide, making it one of the most popular AI models in the world. As such, the cloud business is a jewel in the crown for BABA.

Three-Pronged AI Strategy

BABA’s AI strategy has three elements. First, is the pursuit of Artificial General Intelligence ('AGI') that is focused on enhancing the intelligence of its models. This in turn will drive the AI-led productivity revolution. Because 50% of global GDP comprises labor costs, once the AGI is fully realized, I believe the AI-driven industry will become the largest sector in the world.

Second, is the integration of cloud and AI. The company’s cloud + AI strategy will make Alibaba Cloud the largest AI delivery network within the cloud computing landscape. The company estimates that 90% of the tokens generated by AI models will be via cloud computing networks. With its network of data centers globally, BABA is well positioned to provide AI capabilities to the developers worldwide.

Third, is using AI for all of BABA's business applications. This will help unlock significant value by upgrading its existing offerings. AI will enhance BABA’s B2B and B2C businesses by boosting efficiencies and increasing user engagement and value.

BABA has aggressive plans to invest in the infrastructure over the next three years that will be more than the total investments done in the last ten years. As such, BABA is well positioned to benefit from its Cloud + AI strategy.

Strong Track Record of Share Repurchases

BABA has a very strong balance sheet. As of December 2024, the company reported net cash position of $51.9 billion. This translates to ~15% of the current market cap of ~$350 billion.

The company remains focused on streamlining its operations to concentrate on the core businesses. The company recently announced strategic divestments of Sun Art for $1.6 billion and Intime for $1 billion.

Moreover, BABA continues to pursue share repurchases as a strategy to return capital to its shareholders. During the December 2024 quarter, the company spent $1.3 billion to purchase ~15 million of its ADSs.

During the last 8 quarters, the company has purchased 323 million ADSs for ~$25.6 billion. This translates into repurchases of around 10% of its ADSs. I believe BABA will continue its share repurchase strategy, which in turn will support its stock price.

Alibaba's Stellar Rally

During the last few months BABA has had a stellar rally driven by the euphoria surrounding cost- and energy-efficient AI models.

BABA is now up ~60% YTD driven by a broad rally across the Chinese stock market. This can be compared to a ~6% YTD decline for the Nasdaq-100 and a ~10% YTD decline for Amazon. I believe BABA remains cheap as its outperformance is backed by solid fundamentals and upbeat growth prospects, especially within its Cloud & AI business.

Financial Projections

For my financial projections, I have assumed 8% topline growth for FY25 based on the nine-month performance. Furthermore, for FY26-27 I have assumed a conservative 6% topline growth. Based on the topline growth, I am forecasting EBITDA margins to improve from 20% in FY24 to 22% by FY27.

Financials Forecast

Valuation

For valuation purposes, I am applying the P/S method.

Valuation Model

I have compared BABA to its peers in both e-commerce and technology services. I value BABA using a target multiple of ~2.6x sales using Amazon as a benchmark. Based on 2.6x FY27 sales of CNY1,138 billion, the target price (TP) stands at $183.

Risks

Below are the main risks to my investment thesis:

• BABA is a leading e-commerce player. As such, its fortunes are tied to general macroeconomic conditions and consumer sentiment.

• The company has large operations in China and it is exposed to risks associated with doing business in China.

• The industry where BABA operates is highly competitive. It faces stiff competition from several large and well-established players.

• BABA has acquired several diverse businesses. It is exposed to risks related to acquisitions, investments and alliances.

Conclusion

BABA is a leading e-commerce player and a provider of cloud computing solutions. The cloud business is witnessing strong momentum and the AI business has grown by triple digits for the sixth consecutive quarter. The company has a well-articulated multipronged AI strategy and is well positioned to capture the growth opportunity. The company also continues to repurchase its shares, enhancing shareholder value. Summarily, I have a Buy rating on the stock with a target price of $183.