The focus of "Reevaluating Alibaba": Alibaba Cloud in the AI Era

In the era of AI, Alibaba Cloud is not only seen as Alibaba's new growth engine but also a key factor for investors to reassess Alibaba's value.

UBS stated in its latest research report that with the stabilization of Taotian Group's business and the gradual improvement of new businesses, investors should gradually recognize Alibaba's potential in cloud computing and generative AI. The report stated:

(Alibaba) management believes that the current strong growth of AI cloud business is mainly limited by capacity. With the reduction of inference costs and the decrease in demand for chips, management believes that AI technology has become more affordable, and with the acceleration of digitalization among Chinese enterprises and small and medium-sized enterprises, the AI cloud business has ushered in tremendous growth opportunities.

Goldman Sachs' latest research report also pointed out that against the backdrop of Alibaba's three-year capital expenditure target being raised and its stock price performing better than the market, investors' focus is mainly on the potential returns of expected capital expenditures.

Goldman Sachs' analyst team led by Ronald Keung expects that Alibaba's increased investment in cloud and AI infrastructure, along with the improvement in domestic inference chip supply, will be sufficient to support its revenue growth of over 20% in fiscal years 2026 and 2027. Among them, Alibaba Cloud's AI-related revenue is expected to reach 29 billion and 53 billion RMB in fiscal years 2026 and 2027, accounting for 20% and 29% of total revenue, respectively.

How will the 380 billion capital expenditure be spent?

In mid-last month, Alibaba announced that it would invest over 380 billion RMB in the next three years to build cloud and AI hardware infrastructure, which exceeds the total of the past decade (approximately 300 billion RMB). 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.

Since then, foreign institutions have successively raised Alibaba's target price. Goldman Sachs believes that Alibaba Cloud in the AI era will become a key driving force for Alibaba's growth, especially against the backdrop of the rapid development of the AI market in China.

Goldman Sachs expects that about 80% of Alibaba's 380 billion RMB capital expenditure will be used for AI servers, while the remaining portion will be allocated to general servers, data center infrastructure, and other business segments. This investment plan will significantly enhance Alibaba Cloud's AI computing capabilities, especially in the context of rapidly growing demand for AI training and inference.

Goldman Sachs pointed out that although there are certain uncertainties regarding China's supply of high-end chips, the increase in Alibaba's capital expenditure since 2024 and the gradual improvement in domestic chip supply will be sufficient to support Alibaba Cloud in achieving over 20% revenue growth in fiscal years 2026-2027.

Research shows that Alibaba's capital expenditure structure has undergone a significant transformation, with about 90% allocated to cloud computing equipment, whereas this proportion was only 40-50% previously. In AI server investments, approximately 73% is allocated to GPUs, and 27% to other hardware. In terms of AI server investments, taking eight H20 GPU servers as an example, the profit margin of a single server can reach 20-25% EBIT (Earnings Before Interest and Taxes) and 65-70% EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) Goldman Sachs expects that Alibaba Cloud's AI-related revenue will reach RMB 9.9 billion, RMB 29 billion, and RMB 53 billion in the fiscal years 2025-2027, with the proportion of total revenue increasing from 8% to 29%. This growth is primarily attributed to the efficient utilization of AI servers and the proliferation of AI applications and agents.

Alibaba Cloud's pricing advantage in AI training and inference, especially amid tight supply of high-end GPUs, will bring it higher profit margins.

Goldman Sachs forecasts that Alibaba Cloud's EBITDA margin will gradually increase from 34% in fiscal year 2025 to 40% in fiscal year 2027, while the EBITA margin will rise from 9.7% in fiscal year 2025 to 12% in fiscal year 2027. Although increasing depreciation expenses will exert some pressure on the EBITA margin, the high profit margins from AI cloud services will partially offset this impact.

Goldman Sachs believes that Alibaba Cloud's AI cloud business EBITDA margin will be between 65% and 70%, significantly higher than the profit margins of traditional public cloud businesses, which will lead to a substantial increase in profitability for Alibaba Cloud.

Investor Focus on AI Application Layer, Alibaba has Qwen and Quark

As investments in AI infrastructure are gradually completed, investor attention is shifting from AI infrastructure to AI applications and agents. Alibaba has also made significant progress in this area:

Leading open-source Qwen2.5-Max, Wan2.1 (AI video model), and the latest QwQ-32B (inference model based on Qwen2.532B), whose performance can rival leading models like DeepSeek-R1-671B;

Released a new version of the Quark application, supported by Alibaba's inference model based on Qwen;

Launched the first server-grade CPU C930, which will start delivery to customers in March;

Established a strategic partnership with Manus, focusing on implementing Manus's functionalities on domestic models and computing platforms.

Goldman Sachs emphasizes that Alibaba Cloud's Qwen model's performance in inference and generative AI will further solidify its leading position in the AI market.

Goldman Sachs maintains a "Buy" rating on Alibaba, with a 12-month target price of $160 (HKD 156), approximately 13.5% higher than last Friday's closing price.

UBS reiterated its "Buy" rating and raised Alibaba's target price from $160/$154 HKD to $176/$172 HKD (TTG target price-to-earnings ratio raised from 7 times to 8 times).

Additionally, with the rise of cost-effective and well-functioning open-source models/environments, the model layer is expected to become more commoditized, and reduced computing costs will drive higher AI adoption rates, especially in enterprise application scenarios, supporting years of growth in cloud/data center demand.

As the largest public cloud service provider in China, Alibaba Cloud's market share is about twice that of Huawei Cloud and Tencent Cloud. Goldman Sachs expects that with the further development of AI models, the Chinese public cloud market will continue to maintain healthy growthAlibaba Cloud's leading position in the AI computing field, especially its technological advantages in generative AI and large language models, will give it a favorable position in future market competition.