China's Best AI "Enabler": Alibaba with a Dynamic PE of 12 Times

As both an AI enabler and an AI adopter, Morgan Stanley believes that Alibaba's current valuation is highly attractive.

According to news from the Chasing Wind Trading Desk, Morgan Stanley expressed a bullish outlook on Alibaba in a report dated May 13, stating that considering the backdrop of surging AI demand, Alibaba's dual identity as an AI enabler (cloud computing) and adopter (especially in the e-commerce sector) may provide potential upside for its cloud business revenue growth and profit margins.

Morgan Stanley stated that Alibaba Cloud is the only major cloud service provider in China that offers a large amount of GPU capacity to external customers, and it is expected that revenue growth will accelerate to 25% in the fiscal year 2026, directly benefiting from the explosive growth in AI inference demand. At the same time, as an early adopter of AI, its e-commerce market share may stabilize and open up new markets in instant retail.

Morgan Stanley further indicated that Alibaba's current 12x PE valuation for fiscal year 2026 is highly attractive, with a target price of $180 and a sum-of-the-parts (SOTP) valuation reaching $200, representing an upside of 36-51%. According to the SOTP model, an 8x EV/EBITA valuation is applied to the Taobao Tmall Group, and a 5x EV/sales valuation is applied to the cloud business, resulting in a base case SOTP valuation of $200 per share.

AI Enabler: Unique External Customer GPU Service Provider

Morgan Stanley believes that Alibaba Cloud is poised to benefit from the surge in AI inference demand. Following the market attention sparked by DeepSeek in January, AI inference demand has skyrocketed. Since the second half of 2024, major internet companies have significantly increased capital expenditures for AI, shifting focus from model training to inference (inference, multimodal).

The report states:

Alibaba Cloud occupies a unique position in the Chinese cloud service market as the only provider capable of offering a large amount of GPU capacity to external customers. Unlike other major cloud service providers such as Tencent and ByteDance, Alibaba's cloud business strategy is significant due to its focus on external customers, giving it a distinct advantage in the current market environment of exploding AI inference demand.

Morgan Stanley expects Alibaba's cloud business revenue growth to accelerate from 13% in the third quarter of fiscal year 2025 to 18% in the fourth quarter of fiscal year 2025, reaching 25% in fiscal year 2026.

The report points out that although all major Chinese tech giants have significantly increased capital expenditures, Alibaba announced a total investment of 380 billion yuan over the next three years. However, unlike Tencent (WeChat + Yuanbao) and ByteDance (Douyin + Doubao), the latter two have higher internal AI computing demands, while Alibaba is able to allocate its substantial GPU capacity to external customers. Additionally, Alibaba Cloud's recently launched Qwen3 model has performed excellently in inference, multilingual tasks, and tool usage, further solidifying its technological leadership

AI Adopters: The Potential of E-commerce AI Empowerment Has Yet to Be Reflected in Stock Prices

As an early adopter of AI, Alibaba is integrating AI capabilities into its existing super apps (Taobao, Amap, DingTalk, Quark). The report suggests that Alibaba has a competitive advantage by leveraging its vast proprietary e-commerce user data, which could lead to further revenue growth through better commission rates and advertising conversion rates.

Morgan Stanley points out that Alibaba's extensive proprietary consumer data and wide range of use cases may provide upside potential in stabilizing and/or increasing market share in the e-commerce sector, a potential that has not yet been fully priced in by the market. The report currently forecasts Alibaba's GMV and CMR growth for 2026 at 4% and 6%, respectively, but does not yet account for the enhancement effects of AI on e-commerce.

Taobao has already launched several AI features, including an AI fitting assistant (which recommends products based on user height and weight), the "Taobao AI Q&A" (beta version) based on the Tongyi model, and an AI operational support platform for merchants.

Seizing Instant Retail Opportunities, Expanding a 2 Trillion Yuan Market

Morgan Stanley's report also mentions that Alibaba is entering an instant retail market, which is expected to reach a market size of 2 trillion yuan (approximately 267 billion USD) by 2030, with a compound annual growth rate of 20%. This represents 3.3% of total retail sales in 2030 (1.4% in 2024) or 9.9% of online retail sales (5.1% in 2024).

Alibaba recently upgraded its instant retail business by integrating all instant retail products (hourly delivery) into the top menu item "Browse" of the Taobao App, launched before this year's Labor Day. According to news reports, within six days of the launch, the daily order volume of Taobao's "Browse" (with delivery provided by Ele.me's rider network) exceeded 10 million orders.

It is worth mentioning that, unlike JD's delivery service which was launched with substantial subsidies, Alibaba leverages Taobao's traffic and Ele.me's instant delivery capabilities to enhance its quick commerce products without impacting the profitability of the Taobao Tmall Group and the breakeven roadmap of Ele.me. Morgan Stanley continues to expect the Taobao Tmall Group's EBITA to have a 1% compound annual growth rate from fiscal years 2025 to 2028, while local services are expected to achieve EBITA breakeven in fiscal year 2026