Alibaba has been a tough hold for investors over recent years – MM included – with regulatory overhang, slowing Chinese growth, and intensifying competition all weighing on the stock. Last week’s 1Q earnings, however, provided a more constructive undertone, prompting a sharp rally in the shares.
The headline numbers weren’t flattering: revenue came in below expectations and EBITDA declined 11% YoY as BABA continues to spend aggressively. Still, the e-commerce division (65–70% of revenue) remains resilient, while AI revenue more than doubled YoY, fueling optimism that Alibaba owns the strongest cloud infrastructure in China to monetise the generative AI boom..
The AI theme is incredibly powerful, and investors are taking notice – 20 of the 32 analysts who cover BABA lifted their price targets post-results. The company is leaning hard into two big bets: AI and quick commerce. Both weigh on margins in the near term, but if execution is successful, the upside is significant.
Given margins have been under pressure, and earnings are tracking backwards in the near term, the market has been negative on BABA, prepared to pay only around 10x earnings for the stock over the last few years. The recent rally in the stock despite lower earnings has pushed the PE up to 15.6x times; however, we now have more confidence in their ability to grow strongly in the coming years – most likely from FY27 onwards, when front-loaded spending should transition into more sustainable earnings growth.
The evidence is growing that this is working – the cloud business is gaining traction, and AI revenue doubling is a strong signal, but multiple variables are still in play.
- The health of the Chinese consumer.
- BABA’s ability to scale quick commerce into profitability.
- Most importantly, whether its AI investments translate into durable, high-margin growth. Management has flagged a fresh three-year investment cycle in AI, underlining its strategic priority.
We view BABA as a higher-risk play on China’s AI adoption and its ability to earn money from it. There is tangible evidence that this is working, and sustained growth in their cloud business could provide the kicker for BABA over the coming years.
MM remains long and bullish BABA US
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