Gambling on AI, Alibaba aims for a new throne

Author | Liu Baodan

Editor | Zhou Zhiyu

Many years later, investors may express the same sentiment when looking back at this night: after 25 years of development, Chinese e-commerce giant Alibaba has reached a critical point in its strategic transformation. AI has become a core metric for the capital market's evaluation of Alibaba.

On the evening of February 20, during the analyst conference call for the third quarter of fiscal year 2025, Alibaba Group CEO Eddie Wu stated that there is a clear and significant demand for infrastructure in the AI era, and the company will actively invest in AI infrastructure construction. The investment in cloud and AI infrastructure over the next three years is expected to exceed the total of the past decade.

According to estimates from institutions such as Goldman Sachs, this means that Alibaba's Capex (capital expenditure) over the next three years will exceed 360 billion yuan, with some institutions believing that in an aggressive scenario, it could reach 500 billion yuan. This has shown the market that Alibaba is making substantial investments to stride into the AI era.

At the close of the U.S. stock market that day, Alibaba was priced at $135.97 per share, an increase of 8.09%. On February 21, Alibaba's Hong Kong stock closed up at 14.56%. Several institutions, including Goldman Sachs, HSBC, JP Morgan, Daiwa Securities, and Citibank, have raised their price targets for Alibaba, with Goldman Sachs raising the target price for Alibaba's U.S. stock to $160 and the target price for its Hong Kong stock to HKD 156.

Wall Street Journal also learned from Alibaba Cloud that in addition to making significant investments in AI, cloud computing, and AI infrastructure, as well as AI foundational model platforms and AI-native applications, Alibaba will also focus on upgrading the AI transformation of its existing businesses, which will increasingly impact performance.

In the third quarter of fiscal year 2025, Alibaba achieved revenue of 280.154 billion yuan, a year-on-year increase of 8%, marking the fastest growth rate in over a year. The revenue growth rate for Taotian customer management reached 9%, and Alibaba Cloud's AI-related product revenue has achieved triple-digit growth for six consecutive quarters.

Every round of key technological change brings tremendous disruption to society, as well as unprecedented opportunities. The computing power revolution initiated by Deepseek has completely opened the door to AI applications, and Alibaba is also ready to make a big move.

Addendum

After more than a decade since its establishment, Alibaba Cloud has caught up with the AI technology wave and has entered its golden era.

During the conference call that evening, Eddie Wu announced that Alibaba will continue to focus on three main business types: domestic and international e-commerce, AI + cloud computing technology, and internet platform products. Over the next three years, Alibaba will increase investments in AI infrastructure, foundational model platforms, AI-native applications, and the AI transformation of existing businesses.

What concerns investors is Alibaba's upcoming plans and expectations for its cloud computing business. Eddie Wu stated that the investment in cloud and AI infrastructure over the next three years is expected to exceed the total of the past decade. Several industry insiders indicated that this level of investment exceeds previous expectations.

Data from institutions such as Goldman Sachs indicates that this means the total investment in cloud and AI infrastructure over the next three years will be at least 380 billion yuan. However, some insiders from Alibaba have stated that this figure is not accurate, but it can be confirmed that under the drive of AI, the demand for investment in cloud computing will only increase The confidence of Alibaba Cloud comes from the surge in computing power demand. According to the financial report, for the quarter ending December 31, 2024, Alibaba Cloud achieved revenue of 31.742 billion yuan, a year-on-year increase of 13%, nearly doubling from the previous quarter's growth rate of 7%. This growth is attributed to the increase in public cloud revenue driven by AI-related products, with revenue from AI-related products achieving triple-digit year-on-year growth for six consecutive quarters.

A person from a brokerage firm stated that capital expenditures are considered investments rather than operating activities, primarily linked to long-term strategic investments. For Alibaba, this amount directly reflects the demand for computing power. In this quarter, Alibaba's capital expenditure was 31.8 billion yuan, a significant increase of 80% quarter-on-quarter. This means that Alibaba is making substantial AI investments based on the scale of cloud revenue.

However, in the face of the continuously surging demand for cloud computing, this is still far from enough. Wall Street Journal learned from informed sources that Alibaba's customer demand continues to exceed expectations, especially after the Spring Festival, with inference demand exploding, and over 60% to 70% of new customer demand concentrated in inference scenarios, rapidly expanding the customer base, application scenarios, and industry coverage.

On February 21, HSBC Global Research analysts stated that due to better-than-expected customer management, commission growth, and cloud business expansion, Alibaba's core business revenue this quarter was surprising. Analysts indicated that due to the strong growth in artificial intelligence demand, Alibaba's cloud business revenue is expected to accelerate.

At the meeting, Alibaba disclosed for the first time that the primary goal of the company's AI strategy is to pursue the realization of AGI (Artificial General Intelligence), continuously breaking through the boundaries of model intelligence.

Alibaba believes that all current AI application scenarios are merely phased results in the process of enhancing AI capabilities, with intelligence enhancement being the core of this round of AI technology productivity transformation. The standard definition of AGI is the ability to perform over 80% of human capabilities. Alibaba predicts that if AGI is achieved, the industries related to artificial intelligence could potentially impact or replace about 50% of the current GDP composition.

In terms of business implementation, as an AI infrastructure, Alibaba Cloud's goal is to become one of the largest cloud computing networks for outputting AI intelligence. The company stated that intelligence is the token behind AI models, and in the future, 90% of tokens will be generated and output on cloud computing networks.

Gartner® released the "MarketShare: Services, Worldwide, 2023," indicating that in 2023, Alibaba Cloud continued to rank first in the IaaS market share in the Asia-Pacific region. Through Alibaba Cloud's globally distributed data centers, AI intelligence can be delivered to global application developers more quickly.

Regarding how this funding should be used, Alibaba revealed that overall annual capital expenditures will be relatively even, but there will be fluctuations each quarter, mainly influenced by supply chain cycles and IDC (Internet Data Center) construction cycles, and will be flexibly arranged based on actual conditions.

Alibaba will also significantly increase investment in the research and development of AI foundational models to ensure technological advancement and industry leadership, as well as promote the development of AI-native applications.

Wall Street Journal learned from internal sources that Alibaba will soon release a deep inference model based on Qwen2.5-Max. At the end of January, Alibaba released the flagship version of the AI foundational large model, Qwen2.5-Max, which is at the industry-leading level in several authoritative benchmark evaluations With Alibaba Cloud's large-scale investment, the market will next focus on Tencent and Huawei's spending in the cloud sector, while ByteDance's Volcano Engine is also rapidly catching up.

Efficiency Improvement

Unlike the money-burning logic of the internet era, the consumption of AI in foundational models, computing power, and even energy makes this a field with extremely high barriers to entry.

In the face of the roaring AI era, the fundamental reason Alibaba can achieve large-scale investment is that the company has stabilized its competition in the e-commerce market, while also rapidly divesting non-core assets to lighten its burden and enter the fray with ease.

Financial reports show that Taotian's customer management revenue grew by 9% year-on-year to 100.79 billion yuan, mainly driven by the growth in online GMV and an increase in the Take rate (platform commission rate). The increase in Take rate benefited from the full-quarter impact of basic software service fees and the penetration rate of "full-site promotion."

Alibaba's international digital commerce revenue grew by 32% year-on-year to 37.756 billion yuan, mainly driven by strong performance in cross-border business. This segment is currently also in an investment phase, and Alibaba's management revealed that B2B business will remain stable and bring considerable profits in the coming years, with the profit and loss situation of cross-border business expected to improve significantly in the next few fiscal years.

Alibaba's other internet platform business operating efficiency is steadily improving, with local life group's revenue growing by 12% year-on-year, and losses significantly narrowing year-on-year. The big entertainment group's revenue grew by 8% year-on-year, with losses continuing to narrow. At the same time, Alibaba is further focusing on its core business, having signed equity sale agreements with Intime and Yonghui Retail during the quarter.

Behind the stable e-commerce performance, Alibaba has implemented interconnectivity strategies such as integrating WeChat Pay and JD Express, and the use of AI is also a significant factor. People close to the Taotian Group indicated that the growth in Taotian's performance is attributed to the use of "full-site promotion," and AI has enabled this marketing tool to better enhance efficiency for businesses, especially small and medium-sized enterprises, achieving precise reach.

Alibaba is well aware of this and has begun to accelerate the use and penetration of AI within its business system, which is also the third key investment area beyond AI infrastructure and model platforms.

Opportunities for internal AI applications are becoming increasingly apparent. According to Eddie Wu's introduction at the meeting, the first is the entry point for consumer spending. Through AI technology transformation, Taobao can significantly enhance interaction and transaction efficiency with consumers, while also having vast potential in many consumption areas such as shopping decisions, which is expected to improve user engagement and value on Taobao, potentially bringing greater user value beyond shopping.

In the AI ToC field, Eddie Wu believes that apps like Quark and Tongyi can greatly enhance user search experience, productivity creation, and work efficiency. In the ToB field, DingTalk will leverage AI to reshape internal collaboration and coordination scenarios within enterprises. Additionally, Amap will also have the opportunity to transform from a navigation tool into a life service entry point through AI technology.

Wall Street Insights has learned from within Alibaba that the new fiscal year starting in April will see a clearer AI implementation strategy, especially for strategic innovative businesses like Quark, DingTalk, 1688, and Xianyu. They are referred to as innovative businesses because they align with user trends and the "AI-driven" strategy Wall Street Journal has learned exclusively that 1688 recently launched a free AI digital employee, which saves an average of 4 human resources and reduces business difficulty by 80%. The company will also introduce a business large model based on DeepSeek in the future. "The underlying foundation of the AI digital employee is Tongyi, combined with 1688 data for secondary training."

At the beginning of the year, Quark upgraded its brand slogan to "AI all-round assistant for 200 million people." According to the aforementioned insider, Quark's strategic importance within Alibaba has significantly increased from search products to AI all-round assistants. With Tongyi integrated into Alibaba's Intelligent Information Business Group, there will be more actions based on product perspectives.

In early February, AI scientist Xu Zhuhong officially joined Alibaba as Vice President of Alibaba Group, responsible for multimodal foundational models and Agents related basic research and application solutions for AI To C business. Xu Zhuhong has published several papers on "multimodal pre-training," proposing pre-training strategies that effectively reduce costs. Alibaba rarely discloses talent recruitment for C-end businesses, and the signal behind this is self-evident.

For example, in the e-commerce business, Wall Street Journal learned from insiders at Taotian that Jiang Fan clearly stated during an internal executive meeting during the Spring Festival that the first thing Taobao Tmall must do by 2025 is to promote growth by supporting quality brands and merchants. The meeting also released a signal that the current goal of AI is to help merchants reduce costs with certainty.

The insider further stated that currently, over 80% of the operational plans established on the Alibaba Mama platform are completed through intelligent placement. In 2024, Alibaba Mama will help merchants attract over 10 million new users daily. The cold start of new products has accelerated by nearly 45%; annual promotional guidance transactions have increased by over 100 billion year-on-year.

From AI infrastructure to models, from service platforms to application landing, Alibaba is playing a big game of AI. Just as e-commerce once occupied half of China's market, Alibaba's ambition for AI will only grow.

Ambition

Looking back at the past 25 years of development, Alibaba has had two significant highlights in the capital market that cannot be ignored.

11 years ago, Jack Ma led the trillion-dollar e-commerce platform Alibaba to the New York Stock Exchange, breaking the global IPO record with a financing amount of $25 billion, enhancing American investors' confidence in Chinese tech stocks. At that time, Alibaba surpassed Amazon with a market value of $231.4 billion, second only to Google.

Five years ago, thanks to the explosive growth of the global online economy and the rapid increase in cloud computing demand, Alibaba's stock price reached an all-time high of $319.32, with a market value of $864 billion (approximately RMB 6.3 trillion), accounting for about 34% of the total market value of U.S. listed Chinese companies. Subsequently, Alibaba's stock price fell into a prolonged slump.

From the largest organizational structure being split into six, to the management team represented by Joseph Tsai and Eddie Wu taking office, Alibaba underwent more than two years of strategic adjustments, ultimately locking in e-commerce and cloud computing, and deciding to divest non-core businesses. After that, Alibaba stabilized its position against e-commerce competitors like Pinduoduo and ByteDance, and fully invested in AI.

Now, betting on the AI track allows the capital market to see the possibility of Alibaba creating a third peak in the capital market again The head of the TMT group at the Harmony Huiyi Research Department of a hundred billion private equity stated in an interview with Wall Street Insights that the market had not previously given Alibaba Cloud a good valuation, mainly due to two factors: first, Alibaba Cloud's growth had been slowing down; second, in terms of profit margins, the domestic cloud market is quite competitive and prone to price wars, resulting in Alibaba Cloud's profit margins being significantly lower than Amazon AWS's nearly 40% level for a long time.

Now, these two indicators have changed. The head stated that after the launch of DeepSeek, both domestic governments and enterprises are accelerating their embrace of AI, and the profit margins of AI cloud computing services, including API calls, are relatively high compared to traditional CPU service calls. "Alibaba Cloud has significant revaluation potential."

The 13F quarterly holdings report, known as the "market barometer," is being released one after another. As of December 31, 2024, Morgan Stanley, the world's largest sovereign fund from Norway, "Wall Street's bottom-fishing king" David Tepper's Appaloosa, and leading U.S. tech investors like Primecap Management have all increased their holdings in Alibaba.

Recently, the "king of meme stocks" Ryan Cohen has been continuously increasing his stake in Alibaba, with personal holdings now rising to about $1 billion. Analysts say that Cohen's increase reflects his optimistic view of China's long-term economic growth prospects. Although the $1 billion stake is still relatively small compared to Alibaba's market value, Cohen's move is likely to encourage a large number of retail investors to follow suit.

Currently, Alibaba's market capitalization in Hong Kong is HKD 2.61 trillion, and its market capitalization in the U.S. is $323.1 billion (approximately RMB 2.3 trillion). Since 2025, Alibaba's market value has increased by about $100 billion, but it still has a huge gap of 4 trillion yuan from its peak market value.

On February 13, JP Morgan released a research report stating that Alibaba's stock price still has room for further increases, and the market's valuation of Alibaba Cloud is significantly low. Analysts pointed out: "Based on the average valuation multiple of 6.5 times for U.S. SaaS companies, Alibaba Cloud's value could reach $115 billion, which would raise Alibaba's overall valuation to $320 billion, leaving a 14% upside potential for the stock price."

The aforementioned analysts further noted that if calculated based on Microsoft's valuation multiple of 10.5 times, Alibaba Cloud's value could reach $185 billion, bringing Alibaba's corresponding market value to $391 billion. This means that a valuation adjustment driven entirely by Alibaba Cloud could bring a maximum of 39% upside potential for the stock price.

Compared to the retail industry, cloud computing typically enjoys a higher valuation space. Taking Amazon as an example, the company's current market capitalization is $2.36 trillion (approximately RMB 17 trillion), with half of its profits contributed by AWS. According to Morgan Stanley's November 2023 forecast, the split valuation of AWS could reach $1.2 trillion, equivalent to 80% of Amazon's market value, indicating that cloud business is a hot target in the capital market.

However, the potential for market capitalization is rooted in the fundamentals of the business. Overall, the four North American cloud computing companies' AI-related Capex is expected to exceed an unprecedented $320 billion by 2025, with Amazon accounting for $105 billion (approximately RMB 760.5 billion); Meta $60 billion - $65 billion; Google $75 billion; Microsoft $80 billion.

Although Alibaba Cloud is the largest cloud provider in China, in terms of business planning, its capital expenditure at the trillion-yuan scale is still several times away from international giants.

For Alibaba, the AI-driven cloud computing business has just begun, and the key moving forward lies in the explosive growth of AI-driven applications, which involves the overall reshaping of China's business ecosystem and the fierce competition for global AI technological discourse power.

Looking at the history of corporate development, betting on the right technological trends is an essential skill for companies to continuously navigate through cycles. The insight Jack Ma gained from Nokia and Kodak is that it only takes six months to a year for a company to go from industry benchmark to demise, and this speed may be even faster in the internet industry.

On February 13, Alibaba's Chairman Joseph Tsai appeared in Dubai, discussing his impressions of Jack Ma, Alibaba's innovative gene, and his optimism about the future development of AI. Four days later, Jack Ma attended a private enterprise symposium in Beijing. The successive appearances of these two internet giants indicate that Alibaba is brewing a new round of AI bets.

If Alibaba wants to survive for 102 years, a quarter of that time has already passed. Having created an e-commerce myth, Alibaba is going all in on AI, marking a critical stage in its more than 20 years of development and a must-win battle towards AGI