Alibaba's Valuation Soars
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The stock market is buzzing with renewed enthusiasm for Alibaba, the Chinese tech giant that has seen its stock price soar by an impressive 65% since the beginning of the yearThis remarkable growth has prompted a flurry of activity among investors and financial analysts, pushing firms like Morgan Stanley to reassess their evaluations and projections for the companyIn a surprising twist, Morgan Stanley has openly acknowledged that it previously underestimated the transformative impact of artificial intelligence (AI) on Alibaba's cloud computing operations.
Historically, Morgan Stanley's assessments of Alibaba have fallen short of acknowledging the profound disruptions brought about by industry-wide changesThe emergence of AI technologies this year, particularly highlighted by the rise of platforms such as DeepSeek, has significantly altered the competitive landscapeAnalysts at Morgan Stanley had not anticipated that these shifts would lead to accelerated growth in Alibaba's cloud servicesFollowing a thorough re-evaluation based on current data and market insights, the investment bank has made substantial revisions to its previous growth forecasts for Alibaba.
The latest figures suggest that by the fourth quarter of the fiscal year 2025, which runs from January to March, Alibaba’s cloud revenue could increase by 18%. By the end of fiscal year 2026, this growth rate is expected to reach an even more impressive 25%. Morgan Stanley estimates that with Alibaba's commitment to invest over 300 billion RMB in cloud and AI infrastructure over the next three years, the revenue generated from Alibaba Cloud could see a staggering rise, jumping from 118 billion RMB in fiscal year 2025 to around 240 billion RMB by fiscal year 2028, effectively doubling in just three years.
On the profitability front, Morgan Stanley believes that Alibaba Cloud will benefit from economies of scale, leading to a steady increase in its Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin
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Projections show an increase from 20% this fiscal year to about 35% within three yearsHowever, the bank warns that the significant capital investment required for growth will also lead to an increase in depreciation costs, causing the EBITA margin to decline from the previously estimated range of 10%-12% down to 5%-8% in the 2026 to 2028 fiscal yearsThis fluctuation demonstrates the changing nature of Alibaba Cloud's profitability structure during expansion and illustrates Morgan Stanley's nuanced understanding of the business dynamics.
Beyond cloud computing, Morgan Stanley has also recognized that it had underestimated the resilience of Alibaba's core e-commerce units—Taobao and TmallDespite pressures in the domestic consumer market and intense competition within the industry, the performance of these platforms has not been as fragile as anticipatedSupported by relatively high commission rates, Morgan Stanley forecasts that the Gross Merchandise Volume (GMV) for Taobao and Tmall will still show a growth of 3% to 5% in the coming quarters, even with continued investments in these business segmentsThe ability of these platforms to maintain stable EBITA profits injected much-needed confidence into the market regarding the future trajectory of Alibaba's e-commerce operations.
In light of the updated evaluations of Alibaba’s business segments, Morgan Stanley has significantly raised its price target for Alibaba's American Depositary Receipts (ADR). The target price has been escalated from $80 to a remarkable $180, and the rating increased from "Market Perform" to "Overweight." In its optimistic projections, Morgan Stanley suggests that the cloud business alone could have an intrinsic value of $100 per share, which leads to an overall valuation for Alibaba reaching as high as $300 per shareThis latest target price in the Hong Kong market translates to approximately HKD 174.9, with an upper estimate soaring to HKD 291.5 per share.
Morgan Stanley provided a clear breakdown of how they calculated the $300 upper valuation for Alibaba
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