Admitting to underestimating Alibaba, Morgan Stanley: Under the AGI target, Alibaba Cloud's revenue will double in three years, and the valuation can reach $140 billion!

The wind is rising in the cloud, and Morgan Stanley expects Alibaba's stock price and valuation to soar?

On the 23rd, Morgan Stanley's Gary Yu team released a research report, significantly upgrading Alibaba's rating to "Overweight," raising the target price from $100 to $200, with an optimistic valuation reaching $300.

Morgan Stanley admitted that it previously underestimated the surge in AI-driven cloud computing demand and the resilience of Alibaba's core e-commerce business. Morgan Stanley predicts that Alibaba Cloud's revenue will double within three years, growing from CNY 118 billion in fiscal year 2025 to CNY 240 billion in fiscal year 2028. The EBITDA margin for Alibaba Cloud is expected to increase from approximately 20% in fiscal year 2025 to about 35% in fiscal year 2028.

Based on optimistic expectations for Alibaba Cloud's growth prospects and a reassessment of the resilience of its e-commerce business, Morgan Stanley estimates that under the base scenario, Alibaba's sum-of-the-parts (SOTP) valuation is $200 per share, with the cloud business valued at $60 per share (corresponding to a 5x EV/sales), resulting in a market capitalization of $140 billion for Alibaba Cloud based on the number of shares outstanding.

Notably, Eddie Wu announced on the 24th that Alibaba will invest over CNY 380 billion in building cloud and AI hardware infrastructure over the next three years. This also sets a record for the largest investment ever made by a private enterprise in China in the field of cloud and AI hardware infrastructure construction.

Alibaba Cloud: Doubling Revenue in Three Years, AGI Goals Driving Growth

Morgan Stanley analysts acknowledged that they previously underestimated Alibaba, particularly regarding the surge in AI-driven cloud computing demand and the resilience of its core e-commerce business.

Morgan Stanley believes that as China's largest hyperscale cloud service provider, Alibaba, with its outstanding technology and highly acclaimed open-source large language model (LLM) "Tongyi Qianwen" (Qwen), is poised to seize the enormous opportunities in AI cloud computing.

Based on the following points, Morgan Stanley predicts that Alibaba Cloud's revenue will double within three years, growing from CNY 118 billion in fiscal year 2025 to CNY 240 billion in fiscal year 2028.

1. Surge in AI Demand: Following the release of the DeepSeek model, demand for Alibaba Cloud has significantly increased, with inference demand accounting for 60-70% of the incremental demand. Revenue from AI-related products has achieved triple-digit growth for six consecutive quarters.
2. Aggressive Capital Expenditure: In its recent fiscal year 2025 Q3 earnings report, Alibaba committed to increasing capital expenditures over the next three years, expected to exceed the total of the past decade (approximately CNY 300 billion).
3. Improved Competitive Landscape: The competition in China's cloud industry is fierce; although profitability is lower than in the U.S., the competitive landscape for GPU (rather than CPU) infrastructure has improved, with supply constraints limited to a few hyperscale cloud service providers (Alibaba, Tencent, ByteDance) Morgan Stanley expects that Alibaba Cloud's EBITDA margin will increase from approximately 20% in the fiscal year 2025 to about 35% in the fiscal year 2028. Although the EBITA margin will temporarily decline to 5-8% in the fiscal years 2026-2027 due to increased depreciation, it is expected to recover to 8% in the fiscal year 2028 as the revenue scale of AI-related products expands, with a long-term outlook of reaching 15%.

Valuation Reassessment: Alibaba Cloud's Value Highlights, E-commerce Business Recovers

Based on optimistic expectations for Alibaba Cloud's growth prospects and a reassessment of the resilience of its e-commerce business, Morgan Stanley has raised its target price for Alibaba from $100 to $180 based on a DCF model, corresponding to an expected price-to-earnings (P/E) ratio of 16.6 times for the fiscal year 2027, higher than the current P/E ratio of 13.6 times for the fiscal year 2026.

• The split valuation under the base scenario is $200 per share, with TTG (Alibaba's core business, including Taotian Group, international e-commerce business, local life services, and Cainiao) valued at $90 per share (corresponding to a 10 times P/E ratio), and the cloud business valued at $60 per share (corresponding to a 5 times EV/sales).
• In the optimistic scenario, the split valuation is $300 per share, with TTG valued at $120 per share (corresponding to a 12 times P/E ratio), and the cloud business valued at $100 per share (corresponding to a 7 times EV/sales).

It is noteworthy that in the optimistic scenario, the valuation of Alibaba Cloud ($100/share) is close to the valuation of TTG ($120/share), highlighting its importance within Alibaba's overall business.

Morgan Stanley also upgraded the rating of the Chinese internet industry to "attractive." The report believes that as market focus shifts to China's technological breakthroughs, Chinese internet companies provide excellent investment opportunities as drivers and adopters of AI.