Alibaba (BABA) shares have come under pressure this week after the Chinese ecommerce and cloud giant announced plans to raise HK$80bn (US$10.2bn) through a new share placement, with the proceeds earmarked entirely for artificial intelligence infrastructure. The placement involves 710 million newly issued ordinary shares at HK$112.70 each and is expected to close today (26 August). Hong Kong-listed shares fell more than 8% on the news, while the ADRs – which we own, were only down around ~1.5%.
The immediate issue is dilution, but the strategic rationale we think stacks up – Alibaba is accelerating investment in AI at a time when its cloud business is already showing strong momentum.
Key points:
- Alibaba is raising HK$80bn (US$10.2bn) via a new share placement.
- 100% of the net proceeds will be used to invest in full-stack AI capabilities, including infrastructure and compute capacity.
- Alibaba Cloud external revenue grew 45% year-on-year in the June quarter.
- AI-related product revenue delivered triple-digit growth for the 12th consecutive quarter.
- Group revenue increased 9% year-on-year in the June quarter, although earnings fell sharply as investment in AI and other growth initiatives increased.
The US hyperscale’s are committing enormous amounts of capital to AI infrastructure. Alibaba is taking the same approach in China, where it is already the country’s largest cloud provider and is investing heavily in its Qwen family of large language models.
The key positive is that Alibaba is not investing into a standing start. Cloud growth is accelerating, AI-related revenue is expanding rapidly and management appears increasingly confident that commercialisation is gaining traction. CEO Eddie Wu said the company is seeing improving monetisation across its full-stack AI capabilities, while its latest generation of language, coding, video, audio, image and music models continues to expand the breadth of the platform.
There is a trade-off with all of this. Heavy investment is already weighing on near-term profitability, while the equity raising adds dilution at a time when investors remain sensitive to capital intensity across the AI sector. Alibaba’s customer management revenue also fell 7% in the latest quarter, while operating income declined materially, highlighting that not every part of the business is firing at the same pace.
From a valuation perspective, the stock is also no longer as obviously cheap as it has been historically. Alibaba is trading on around 15.5x blended forward earnings, roughly 25% above its five-year average of 12.4x, although still well below the peaks reached during prior periods of optimism, and we wouldn’t flag it as expensive.
We own BABA and remain positive despite the dilution from the capital raising. The placement is a short-term negative, but we think the strategic rationale is sound, with the proceeds directed entirely toward AI infrastructure at a time when Cloud growth is accelerating sharply.
MM remains positive on BABA US
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