Morgan Stanley: Alibaba has become China's best AI enabler
Morgan Stanley has called Alibaba "China's best AI enabler" and raised the company's target price to $165. Alibaba Cloud has become a key growth engine, with a year-on-year growth of 26% in the first fiscal quarter, where AI-related revenue has contributed over 20%. It is predicted that the growth rate in the second fiscal quarter will further accelerate to over 30%. The firm believes that the strong growth and long-term value of Alibaba Cloud and AI business are sufficient to offset the company's short-term losses in the instant retail business
As the wave of AI sweeps across the globe, Wall Street investment bank Morgan Stanley has bestowed a new crown upon Chinese tech giant Alibaba.
According to reports from the Chase Wind trading desk, Morgan Stanley gave Alibaba a positive evaluation as "China’s Best AI Enabler" in a research report released on August 31, raising its target price for Alibaba's U.S. stock from $150 to $165.
The core logic of the bank is that AI is strongly driving the accelerated growth of Alibaba Cloud's business and is expected to help this tech giant consolidate its advantages in fierce market competition.
Morgan Stanley expects Alibaba Cloud's growth in the second fiscal quarter to accelerate from 26% in the first fiscal quarter to over 30%, with AI-related revenue accounting for more than 20% of Alibaba Cloud's total revenue.
However, this optimistic outlook is accompanied by caution regarding short-term profitability. The report points out that Alibaba's massive investments in the instant e-commerce sector will weigh on recent profits, with losses in this business expected to widen to RMB 35 billion in the second fiscal quarter. Nevertheless, the bank has raised its long-term profit forecast for Alibaba, showing confidence in the returns from its strategic investments.
AI-Driven Cloud Business Acceleration
Morgan Stanley views Alibaba Cloud as the "main battlefield" for Alibaba to capture AI opportunities.
Data shows that Alibaba Cloud achieved a 26% year-on-year growth in the first fiscal quarter, exceeding market expectations. Behind this strong growth is the support of AI-related revenue, which has achieved triple-digit growth for eight consecutive quarters. The contribution of AI-related revenue to the total revenue of the cloud business exceeds 20%, a ratio that "is among the highest globally."
The report believes that Alibaba Cloud's growth momentum will continue in the coming quarters. Its driving forces mainly come from three aspects: strong industry demand, upgraded product offerings (such as the Tongyi Qianwen large model upgrade), and strategic partnerships with companies like SAP.
Based on these factors, the report predicts that Alibaba Cloud's growth rate in the second fiscal quarter will reach over 30%, further consolidating its market position.
Short-Term Pain: Instant E-Commerce Investment Weighs on Profitability
While the AI business is booming, Alibaba is incurring high short-term costs for another front—instant e-commerce.
Morgan Stanley estimates that the company's investment in this area in the first fiscal quarter was about RMB 11 billion, with preliminary results showing that the peak daily order volume in August reached 120 million, compared to Meituan's 150 million.
Considering seasonal factors in summer, the bank further estimates that the company's losses in the second fiscal quarter will widen from the previously predicted RMB 20 billion to RMB 35 billion, which may mark the peak of investment.
The report has raised its forecast for Alibaba's total investment in instant e-commerce for this fiscal year from RMB 50 billion to RMB 80 billion. This massive investment has also directly led the bank to lower its adjusted net profit forecasts for Alibaba for the fiscal years 2026 and 2027.
However, the report also cites Alibaba's management commitment to halving unit economic loss (UE) within the next 1-2 months and setting a long-term goal of achieving a total merchandise transaction volume (GMV) of RMB 1 trillion by the fiscal year 2028
Maintain Overweight Rating, Optimistic About Long-Term Value
Despite short-term profit pressures, Morgan Stanley remains optimistic about Alibaba's long-term value. The bank raised the valuation of Alibaba Cloud's business from $60 per share to $67 to reflect its growth potential in the AI era.
The report summarizes that while the market needs to focus on the return on investment for instant e-commerce business, Morgan Stanley still believes that with China's largest cloud infrastructure, Alibaba is a major channel for capturing the growth of AI-related demand in China. The revised target price of $165 indicates the bank's confidence in its long-term profitability.
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