Morgan Stanley: The growth logic of Alibaba Cloud is "intact," and the market has not fully priced it in

Morgan Stanley stated that although the growth rate of core e-commerce business (CMR) is slowing down in the short term, the investment logic pillar of Alibaba—Alibaba Cloud—is growing steadily.

On November 26, according to news from the Chasing Wind Trading Desk, Morgan Stanley mentioned in its latest research report that Alibaba Cloud's business is supported by strong industry demand. The management indicated that current industry demand exceeds supply, and the existing RMB 380 billion three-year capital expenditure guidance may be insufficient to meet current customer needs.

Analysts Gary Yu and others at the firm also stated in the report that newly launched AI applications such as Quark AI Assistant and Tongyi Qianwen are expected to further drive user adoption rates. It is expected that Alibaba Cloud's revenue will grow by 35% in the third fiscal quarter (fourth quarter) and by 36% in the fourth fiscal quarter (first quarter of next year).

At the same time, Morgan Stanley expects that due to the weak macro environment, the growth rate of Alibaba's Customer Management Revenue (CMR) will slow to 7.5%. The economic loss of the Cainiao business unit is expected to narrow to RMB 25 billion, in line with market expectations.

The firm emphasized that the current Alibaba is a typical recovery story of "cloud growth acceleration + narrowing losses in instant e-commerce," and the current stock price has not fully accounted for the explosive potential of AI-driven cloud business. It maintains an "Overweight" rating on Alibaba, with a target price of $200 unchanged, representing a 27% upside from the current price.

According to an article from Wall Street Watch, Alibaba delivered an unexpectedly strong performance in cloud business growth and AI capital expenditure, which once pushed the stock price up by 4% in pre-market trading on Tuesday. However, the market's optimistic sentiment did not last. After the earnings call, the stock price turned downward, ultimately closing down more than 2%.

Alibaba Cloud: Supply Shortage, Steep Growth Curve

The report states that market concerns about cloud business are unnecessary. Morgan Stanley clearly pointed out that Alibaba Cloud's growth logic remains intact.

The firm expects cloud revenue growth to maintain a strong level of 35% in the third fiscal quarter (i.e., the December quarter). But this is just the beginning; Morgan Stanley expects the growth rate to reach 36% in the fourth fiscal quarter and further accelerate to 40% in the fiscal year 2027.

Morgan Stanley noted that Alibaba's management provided extremely optimistic comments on industry demand—currently, "demand exceeds supply." Management hinted that the current three-year capital expenditure guidance of RMB 380 billion may even be insufficient to meet current customer needs.

Morgan Stanley believes that this is a key bullish signal; the cloud business is the core driver of future stock prices, and the tight supply-demand relationship will support revenue explosions in the coming quarters. The bank pointed out that Alibaba Cloud's AI-related business has achieved triple-digit growth for nine consecutive quarters. Recently launched new AI applications include Quark AI Assistant and Tongyi Qianwen application, which are expected to further enhance user adoption.

The latest financial report shows that Alibaba Cloud's revenue in the second fiscal quarter reached RMB 39.824 billion, a year-on-year increase of 34.5%, with adjusted EBITA of RMB 3.604 billion and a profit margin of 9.0%, all exceeding JP Morgan's previous expectations.

E-commerce business faces macro pressure, Cainiao's loss situation better than expected

JP Morgan expects the growth rate of the core e-commerce business in the third fiscal quarter to slow to 7.5%, mainly due to the drag from a weak macro environment.

In October, the growth rate of online retail sales further slowed to 5%, with package volume dropping from low double-digit growth in September to 8% in October, and GMV is expected to drag down the revenue of the core e-commerce business.

The bank also pointed out that the high base effect brought by the implementation of service fees in September last year offset the rate improvement contributed by the full-site marketing tools and Cainiao advertising.

The latest financial report shows that in the second fiscal quarter (third quarter), the adjusted EBITA of the Chinese e-commerce group was RMB 10.497 billion, a year-on-year decrease of 76.3%, mainly affected by rapid business investments.

Additionally, Morgan Stanley believes that Cainiao's loss situation is better than previously feared. The bank has lowered its expectation for Cainiao's loss in the third fiscal quarter from RMB 37 billion to RMB 25 billion, which is basically in line with expectations.

The execution situation is better than expected, and Alibaba has successfully achieved its previous goal of halving unit economic losses, while GMV share is estimated to reach 40%, and order share remains stable.

Morgan Stanley believes that Cainiao's losses peaked in the second fiscal quarter and expects them to narrow to RMB 25 billion in the third fiscal quarter. The bank expects the EBITA of the e-commerce business in the third fiscal quarter to be RMB 37 billion, a year-on-year decrease of 40%, with total EBITA of RMB 32 billion, a year-on-year decrease of 41%