After the earnings report, the stock price plummeted. Morgan Stanley stated: The growth logic of Alibaba Cloud has not changed!

After the earnings report, the stock price plummeted, but Morgan Stanley believes that Alibaba Cloud's strategy is intact, and its monetization capability continues to strengthen, with market expectations being too high.

On Thursday evening, Alibaba's earnings report showed that the group's revenue for the fourth fiscal quarter grew by 7% year-on-year but fell short of expectations, while net profit saw a significant year-on-year increase. Following the earnings release, Alibaba's stock price dropped by about 8%, significantly underperforming the market.

According to news from the Chasing Wind Trading Desk, Morgan Stanley's Gary Yu and his team released a research report on Thursday stating that although Alibaba's latest earnings report was slightly below Wall Street's expectations, the growth logic of Alibaba Cloud remains solid and will continue to benefit from explosive demand growth in the AI industry.

In the report, Morgan Stanley maintained its "Overweight" rating on Alibaba and kept the target price unchanged at $180.

Market expectations for cloud business are too high, but its growth logic remains solid

According to Morgan Stanley's analysis, Alibaba's stock price decline is mainly due to the market's overly high expectations for a 20% growth in Alibaba Cloud's business, while the actual reported growth rate of 18% aligns with Morgan Stanley's forecast.

Another analysis pointed out, while Alibaba Cloud's revenue growth did not significantly exceed expectations, the profit margin for this quarter declined more severely than anticipated. The actual adjusted EBITA profit for this quarter was 2.42 billion, with a profit margin decreasing by 1.9 percentage points quarter-on-quarter, which is 1.5 percentage points lower than market expectations.

The report believes that the seasonal factors of the Spring Festival and supply chain fluctuations in the fourth quarter have masked its true growth potential. According to the report, revenue from AI-related products has maintained triple-digit growth for the seventh consecutive quarter, which is highly attractive for investment.

Morgan Stanley believes that the investment logic for Alibaba Cloud remains solid, mainly based on the following factors:

1. Industry demand exceeds supply: As the only service provider focused on external cloud business, Alibaba will benefit from the industry's prosperity;

2. Synergistic advantages of the Qianwen model: Alibaba's open-source Qianwen 3 model has both edge-side and cloud-side applications, and the two work together to enhance customer stickiness;

3. Continuous Investment in AI Infrastructure: Although it may impact profit margins in the short term, it will support long-term growth.

The report also cited CEO Eddie Wu's remarks during the earnings call, indicating that Alibaba Cloud's revenue growth rate will remain in an "upward channel" in the coming quarters, and the management has "strong confidence" in this.

Additionally, Alibaba's management revealed two key trends during the call: first, AI applications are penetrating from internal systems to user-side scenarios among large and medium-sized enterprises; second, the user base for AI products is expanding from large and medium-sized enterprises to a large number of small and medium-sized enterprises.

Eddie Wu explained during the call:

"The new customer demand is largely driven by inference applications or inference scenarios, and in fact, their large-scale rollout may gradually occur in the coming months. Perhaps in February, March, or even April and May."

Morgan Stanley expects that Alibaba Cloud will achieve a 22% revenue growth in the first quarter of fiscal year 2026 (next quarter), which will become an important catalyst for the stock price rebound.

E-commerce Business: Monetization Efficiency Continues to Improve, AI-Enhanced Prospects Are Broad

In the fourth quarter, Alibaba's Taotian Group (TTG) achieved a 12% growth in Customer Management Revenue (CMR), significantly exceeding analysts' expectations of 9%.

Morgan Stanley pointed out that the growth rate of CMR continues to outpace GMV growth, a trend expected to last for at least two more quarters, mainly due to the implementation of a 0.6% service fee and the increase in overall marketing penetration.

The report anticipates that Alibaba's GMV growth will keep pace with the industry, with a strategy to enhance user engagement and usage frequency by embedding AI features into the Taobao and Tmall platforms. CMR is expected to grow by 10% in F1Q26, and core business adjusted EBITA is expected to grow by 6%, which has taken into account reinvestment in content, user acquisition, and subsidies.

Alibaba's Valuation Remains Within a Reasonable Range

It is worth noting that Alibaba has repurchased approximately $11.99 billion in stock over the past 12 months and announced a $2 dividend per American Depositary Share for fiscal year 2025 (regular $1.05 + special $0.95), totaling $4.6 billion in dividends. According to the report, Alibaba returned a total of $16.5 billion to shareholders last year.

Morgan Stanley expects that Alibaba's total revenue will grow by 8% year-on-year in fiscal year 2026, with customer management revenue growing by 7% and cloud revenue growing by 25%. The group's adjusted EBITA is expected to grow by 10%, although this considers increased investments in AI and local services, which will be partially offset by continued monetization of Taotian and narrowing losses in other businesses.

The report also stated that Alibaba's expected price-to-earnings ratio for fiscal year 2026 is only 12 times, while Morgan Stanley's target price implies a 16 times price-to-earnings ratio for fiscal year 2027, still within a reasonable valuation range