Recently, Alibaba Group announced its financial results for the third quarter of the fiscal year 2025, revealing a quarterly revenue of 280.15 billion yuan, representing an 8% year-on-year growth. This strong performance has been attributed to a notable acceleration in their e-commerce sector, a rebound in revenue growth for Alibaba Cloud, and robust demand for AI-related products, which has seen triple-digit growth for six consecutive quarters. Such impressive results surpassed market expectations and had a direct impact on Alibaba’s stock prices, which surged after the financial report was released.

In the American stock market, Alibaba's shares soared by 9.58% in pre-market trading. Once the market opened, the upward momentum continued, peaking with an increase of 14.59%. As a result, the closing price reached $143.75, driving the company's market capitalization to approximately $341.5 billion.

From the beginning of the year to now, Alibaba's stock price has surged by 60%, positioning the company as a key player in the rally of Chinese stocks in the U.S. Following the earnings announcement, numerous international investment banks quickly revised their target prices for Alibaba's shares, with major firms such as Goldman Sachs, HSBC, Jefferies, Bank of America, and UBS raising their targets to a range of $150 to $170.

The financial report detailed that Alibaba Cloud generated revenue of 31.7 billion yuan this quarter, reflecting a year-on-year growth of 13%, improving from the previous quarter's 7% and well above the consensus market expectation of 9.7%. Furthermore, the income driven by AI-related demands has consistently recorded triple-digit growth for six straight quarters, indicating a strong outlook for future acceleration in cloud growth. The adjusted EBITDA for Alibaba Cloud reached 3.14 billion yuan, surpassing expectations of 2.83 billion yuan.

The rationale behind this recent surge in stock prices revolves around a renewed recognition of Alibaba Cloud's value, propelling a re-evaluation of Alibaba's overall valuation. On February 21, Goldman Sachs released a report significantly raising its 12-month target price for Alibaba from $117 to $160—an increase of 37%. This adjustment was fueled by revisions to three key parameters outlined in its Sum-of-the-Parts (SOTP) valuation method.

Firstly, there has been an uptick in the valuation multiple for Alibaba Cloud. Goldman revised its growth projections for Alibaba Cloud to 23% and 25% for fiscal years 2026 and 2027, respectively, which led to an increase in the company's target price-to-sales ratio (PS) from 2.8 to 3.5. This adjustment raised the valuation contribution from $19 per ADS to $31.

Secondly, Goldman Sachs adjusted the target price-to-earnings (P/E) ratio for Taobao and Tmall—which constitute Alibaba’s domestic e-commerce operations—from 8 to 9 times, anticipated by a 9% year-on-year growth in customer management revenue (CMR), exceeding market expectations, and stabilizing Alibaba’s domestic e-commerce market share.

Thirdly, the overall discount rate for the SOTP valuation dropped from 25% to 15%, driven by an increased contribution of cloud business to overall valuation—now accounting for 19%—along with the improvement of loss-making units like Cainiao and international digital commerce, which lessens the risk premium associated with non-core assets.

HSBC also adjusted Alibaba’s target price upward to $160, suggesting a potential upside of 27.2% compared to the closing price of $125.79 on that day. This adjustment was based on the dual usage of SOTP and discounted cash flow (DCF) valuation methods.

In the discounted cash flow model, with a maintained capital cost of 9.4% and a perpetual growth rate of 3.5%, the projected free cash flow for the next three years was adjusted upwards. In the SOTP evaluation, the PS ratio for cloud business rose from 2.8 to 3.5, adding an additional $11 per share, while the discount for non-core businesses shrank from 25% to 15%, further revealing hidden values.

HSBC noted that a primary driver behind rising valuations is the breakthroughs in cloud business. During the earnings call, Alibaba’s management revealed that 60% to 70% of new computing power purchases were driven by AI inference demands, leading to revised expectations for revenue growth.

Citi maintained its "buy" rating on Alibaba, upping its 12-month target price for its Hong Kong-listed shares to HKD 166 and for U.S. shares to $170. The report stated that Alibaba is at the pivotal moment of its AI transformation, with increased capital expenditures aimed at developing cloud computing infrastructure to capitalize on industry shifts.

Citi also upgraded the valuation multiple for Alibaba Cloud from a PS of 4 to 5, resulting in a valuation estimate of $99.4 billion (around $42.1 per share), accounting for almost 25% of Alibaba's overall valuation. This tweak is based on the consistent triple-digit growth in revenue related to generative AI, which represents over 60% of the inference demand, adjusting the FY2026 revenue growth expectation from 15% to 21.8%.

From the perspective of AI infrastructure, Alibaba Cloud stands as China's largest cloud service provider, completely restructuring its underlying hardware, computing power, storage, networks, databases, and big data around AI, resulting in a formidable base for the AI era. According to Canalys, by the third quarter of 2024, Alibaba Cloud held a 36% market share.

On a model level, during the earnings call, Alibaba disclosed plans to launch a deep inference model based on the Qwen 2.5-MAX framework soon. Earlier in January, Alibaba had introduced its flagship AI foundational model Qwen 2.5-Max, which has achieved leading industry status in multiple authoritative benchmark evaluations. Currently, over 90,000 global derivative models of Qwen have been created, making it the world's top-ranked model.

On the commercialization front, although Qwen, the open-source model from Alibaba Cloud, does not entail direct charges, it provides paid API interfaces through the Bai Lian platform. Developers of derivative models are naturally integrated into the Alibaba Cloud ecosystem, enhancing the sales of associated cloud services generated by AI applications. Management stated during the earnings call that in the future, "90% of tokens will be generated and output in the cloud computing network, and the scale of such massive models can only be efficiently computed on cloud networks. Through our globally distributed data centers, we can deliver services rapidly to global application developers."

"We regard AI as a once-in-decades opportunity for industry transformation," emphasized Alibaba's management in the call, stating that the primary goal of their AI strategy is to push the boundaries of intelligent capabilities in models, ultimately pursuing Artificial General Intelligence (AGI). Management estimated that if AGI achieves 80% of human capabilities, corresponding industries could reconstruct 50% of global GDP composition, positioning the AI industry as a new pillar of the global economy moving forward.

For reference, Microsoft's Azure reported a year-on-year revenue growth of 31% in the fourth quarter of 2024, with AI contributing to a 13% increase, boasting an annualized revenue run rate exceeding $13 billion, and a PS multiple of approximately 10.5. Amazon Web Services (AWS), during the same period, reported a revenue growth of 19%, with an operating margin of 35%, and a PS multiple of roughly 8. Comparatively, Alibaba Cloud's current PS multiple stands at about 4-4.5, indicating that the market may be underestimating its AI commercialization potential.

If Alibaba Cloud's AI revenue continues to rise over the next three years, considering a PS of 10X, there is a potential upward revaluation opportunity of an additional 30% for Alibaba.

(This content is for reference only and does not serve as any investment advice.)