I'm LongbridgeAI, I can summarize articles.Bernstein analyst Robin Zhu cut Alibaba's price target by 8% to $165, citing investor concerns over a $10.2 billion equity raise for AI expansion, which has led to a 5% stock drop. Despite doubts about spending plans given Alibaba's cash reserves, Zhu maintains an Outperform rating, arguing that AI investments in Zhenwu and M890 chips could yield solid returns with payback periods of 2.5 to three years. Wall Street consensus remains Strong Buy with an average target of $189.46.
Alibaba (BABA) stock is facing continued investor concerns after the company announced a $10.2 billion equity raise to fund its AI expansion. In a new report today, Bernstein analyst Robin Zhu acknowledged those concerns and cut his price target by about 8% to $165 from $180, while maintaining an Outperform rating on Alibaba. Since Alibaba announced the share sale on Aug. 23, the stock has fallen about 5%.
Zhu said it is "not hard to sympathise" with investors who are unhappy with the deal. Some investors told Bernstein that issuing new shares while Alibaba had $30.7 billion in net cash raised doubts about the company's spending plans. Those concerns also come after Alibaba's latest results showed the cost of its AI push. Capital spending rose 75% year over year to about $10.07 billion.
Still, Zhu's analysis suggests the AI spending could pay off faster than investors may expect.
Bernstein Sees Solid Returns From Alibaba's AI Spending
Bernstein's work on Alibaba's data-center business supports management's view that its AI investments can generate good returns. The firm estimates that Alibaba's existing Zhenwu 810E AI chip, which is used to support the company's data-center operations, could recover its capital cost in about three years.
The newer M890 AI chip could do even better. Commercial deployment began in August, and feedback from Alibaba's sales channels points to a 2.5-year payback period.
There are also signs that demand for AI infrastructure remains strong. Online prices for server rentals have continued to rise in recent months. Discussions with key customers also point to continued tightness in the market.
That helps explain why Zhu remains positive on Alibaba's AI spending despite the concerns around the new shares. His lower price target reflects the recent pressure on the stock, but his analysis still supports management's view that the company can earn solid returns on its AI investments.
Is Alibaba Stock a Buy Now?
Wall Street remains constructive on the stock. Alibaba carries a Strong Buy consensus rating based on 12 Buy ratings over the past three months. The average BABA price target stands at $189.46, suggesting roughly 67.31% upside from current levels.