Alibaba's (BABA, Financial) stock has surged 65% this year. Morgan Stanley has acknowledged underestimating the demand for Alibaba's cloud services driven by artificial intelligence (AI) and the resilience of its core Taobao and Tmall businesses. The firm has now raised its price target for Alibaba's American Depositary Receipts (ADR) from $100 to $180 and upgraded its rating to "Overweight" from "Equal-weight".
Morgan Stanley predicts that Alibaba's cloud revenue will double over the next three years, increasing from RMB 118 billion in fiscal 2025 to RMB 240 billion in fiscal 2028, thanks to Alibaba's planned capital investment of over RMB 300 billion in cloud and AI infrastructure. The estimated EBITDA margin for Alibaba Cloud is expected to rise from 20% currently to 35% in three years.
The report highlights previous misjudgments, including an underestimation of Alibaba Cloud's growth acceleration post-DeepSeek emergence since January. Additionally, the report emphasizes the strength of the Taobao and Tmall businesses, supported by higher commission rates, with projected GMV growth of 3% to 5% in coming quarters.
Morgan Stanley's valuation for Alibaba under different scenarios ranges up to $300 per share, considering the segmented business valuations of e-commerce and cloud services. The firm also upgraded its investment rating for Chinese internet stocks to "Attractive," with Tencent, Meituan, Pinduoduo (PDD), and JD.com as preferred choices.
