Alibaba Group, once primarily associated with e-commerce, is now surging ahead as a formidable player in the cloud computing and artificial intelligence sectorsThis transformation has captured the attention of global markets, with Morgan Stanley's recent decision to upgrade Alibaba's stock rating from "Neutral" to "Overweight" creating a stir in the financial communityThe firm has revised its target price for Alibaba's stock from a previous estimate of $100 per share to an ambitious $200, with some analysts even predicting valuations that could reach as high as $300 per shareThese projections reflect a confluence of factors, including the rapid expansion of Alibaba Cloud and the growing demand for AI-driven cloud services, which are poised to redefine the competitive landscape.

Morgan Stanley's analysts, who had previously been cautious about Alibaba's prospects, have come to realize that they underestimated the sheer potential of the company’s cloud computing arm, particularly in the context of the AI boomThey now anticipate that Alibaba's cloud revenue will experience explosive growth in the coming years, predicting a doubling of revenue from 118 billion yuan in fiscal year 2025 to a staggering 240 billion yuan by 2028. This optimistic outlook is underpinned by the expected rise in profitability, with Alibaba Cloud’s EBITDA margin forecast to soar from 20% in 2025 to approximately 35% by 2028. This dramatic shift in expectations is a testament to Alibaba’s ability to leverage AI technology to propel its growth and transform its cloud services into a key driver of future success.

What is particularly striking about this transformation is the scale of Alibaba's commitment to innovationOn February 24, CEO Wu Yongming unveiled plans for a historic investment in cloud and AI infrastructure, with the company set to allocate over 380 billion yuan over the next three yearsThis monumental investment marks Alibaba as a leader in the global push toward cloud computing and AI development, as the company seeks to position itself at the forefront of technological advancement

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Notably, this commitment represents the largest capital allocation by any private Chinese company in the field of cloud computing and AI, signaling a serious and sustained effort to dominate the space.

As Alibaba Cloud continues to expand, it is experiencing a surge in demand, particularly driven by the success of the DeepSeek AI modelThe company has seen triple-digit growth in AI-related product sales, with these products expected to account for 60-70% of Alibaba Cloud's new revenue streams in the coming quartersThis is a significant development, as it demonstrates how AI is not only a buzzword but a major revenue driver for AlibabaThe market’s response to this shift has been positive, with analysts now revising their growth estimates upwardAlibaba’s pledge to aggressively invest in AI and cloud infrastructure signals that the company is ready to surpass its previous achievements, including the total investment made in these areas over the past decade.

The competitive dynamics within the cloud service industry in China are also undergoing a major transformationTraditionally, Chinese cloud providers have relied on CPU-based infrastructure, but there has been a noticeable shift towards GPU-based systemsThis shift has led to a more concentrated market, with a handful of key players—such as Alibaba, Tencent, and ByteDance—dominating the spaceMorgan Stanley points out that while profitability levels in the Chinese cloud industry still lag behind those in the U.S., the overall improvements in infrastructure and competition suggest that China’s cloud computing market is entering a transformative phaseThe entry of new players and the heightened competition will drive further innovation, giving Alibaba a unique opportunity to expand its market share.

For Alibaba, the future of its cloud business lies not only in its technological advancements but also in its profitabilityMorgan Stanley has raised its forecast for Alibaba Cloud’s EBITDA margin, predicting a steady increase to 35% by 2028. However, the path to this growth is expected to be bumpy, with short-term fluctuations in profitability due to depreciation costs

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The analysts predict that Alibaba Cloud's EBITDA margin may temporarily dip to between 5% and 8% during fiscal years 2026-2027 before rebounding as AI-related product sales begin to generate higher marginsThis cycle of investment, short-term volatility, and long-term growth is characteristic of tech companies in a rapidly evolving sector, where short-term challenges often give way to sustained market leadership.

In light of these developments, Morgan Stanley has undertaken a comprehensive reevaluation of Alibaba’s equityThe analysts have adjusted their discounted cash flow (DCF) model, resulting in a sharp increase in Alibaba’s projected share price, which has now been revised from $100 to $180. This new valuation corresponds to an estimated price-to-earnings (PE) ratio of 16.6 for fiscal year 2027, up from the current ratio of 13.6 for fiscal year 2026. This upward revision is a clear indication of Morgan Stanley’s renewed confidence in Alibaba’s growth prospects, particularly in light of its expanded cloud services and AI initiatives.

The investment community is increasingly taking note of Alibaba’s transformationUnder a baseline scenario, the company’s stock is valued at $200 per share, with the core business—spanning Taobao, international e-commerce, local services, and Cainiao—valued at $90 per share, and the cloud division valued at $60 per shareHowever, in a more optimistic scenario, the spin-off valuations could reach $300 per share, with the core business valued at $120 and the cloud business at $100 per shareThis optimistic scenario underscores the growing importance of Alibaba Cloud in the company’s overall strategy, with the cloud division increasingly seen as a key driver of future growth.

Additionally, Morgan Stanley’s broader outlook for the Chinese internet sector has also shifted, with the firm upgrading its rating for the entire sector to "attractive." The analysts highlight the strategic advances being made by Chinese tech firms, particularly in the realm of AI, and note that these companies are increasingly seen as leaders in AI development and adoption

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