Morgan Stanley: Alibaba Cloud’s growth logic is "intact," and the market has not fully priced it in.
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Morgan Stanley says that although the core e-commerce business (CMR) growth has slowed in the short term, the main pillar of Alibaba's investment logic—Alibaba Cloud—remains solid in its growth.
On November 26, according to Zhuifeng Trading Desk, Morgan Stanley stated in its latest research report that Alibaba Cloud’s business is supported by strong industry demand, and management indicated that current industry demand exceeds supply; the existing three-year capital expenditure guidance of RMB 380 billion may not be enough to meet current client demand.
The firm’s analysts, including Gary Yu, also said in the report that newly launched AI applications such as Quark AI Assistant and Tongyi Qianwen app are expected to further drive up user adoption rates. Alibaba Cloud’s revenue is expected to grow 35% in the third fiscal quarter (fourth calendar quarter) and 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, Alibaba’s customer management revenue (CMR) growth will slow to 7.5%. Cainiao's unit economic loss is expected to narrow to RMB 25 billion, which is in line with market expectations.
The firm emphasized that Alibaba today is a classic recovery story of “accelerating cloud growth + narrowing instant e-commerce losses.” The current stock price has yet to fully reflect the AI-driven explosive potential of the cloud business. The “Overweight” rating is maintained for Alibaba, with a target price of $200, representing a 27% upside from the current price.
According to a Wallstreetcn article, Alibaba delivered a better-than-expected performance in cloud business growth and AI capital spending, at one point driving its U.S. stock price up 4% in pre-market trading on Tuesday. However, optimism in the market didn’t last. After the earnings call, the stock reversed course and ultimately closed down more than 2%.
Alibaba Cloud: Demand Exceeds Supply, Steep Growth Curve
The report states that market worries about the cloud business are unnecessary. Morgan Stanley explicitly identifies Alibaba Cloud’s growth logic as fully intact.
The firm expects that in the third fiscal quarter (i.e. the December quarter), cloud revenue growth will remain at a robust 35%. But this is just the beginning; Morgan Stanley expects the growth rate to reach 36% in the fourth quarter, and further accelerate to 40% in fiscal year 2027.
Morgan Stanley says Alibaba management made very optimistic comments about industry demand—currently there is “demand exceeding supply.” Management hinted that the current three-year RMB 380 billion capex guidance may not be enough to meet current client demand.
Morgan Stanley believes that this is a key bullish signal, with the cloud business being the core driving force for future stock price increases. The tight supply-demand relationship will support explosive revenue growth in coming quarters.
The firm points out that Alibaba Cloud’s AI-related business has seen triple-digit growth for nine consecutive quarters. Recently launched new AI applications, including Quark AI Assistant and Tongyi Qianwen, are expected to further increase user adoption rates.
Latest financial results show that Alibaba Cloud’s revenue in the second fiscal quarter reached RMB 39.824 billion, an increase of 34.5% year-on-year. Adjusted EBITA was RMB 3.604 billion, and the profit margin reached 9.0%—both exceeding Morgan Stanley’s previous expectations.
E-commerce Business Faces Macro Pressures, Cainiao Losses Better Than Expected
Morgan Stanley expects core e-commerce business growth to slow to 7.5% in the third fiscal quarter, mainly due to drag from the weak macro environment.
Online retail sales growth in October further slowed to 5%, with parcel volume dropping to 8% in October from double-digit growth in September. GMV is expected to drag down the core e-commerce business revenue.
The firm also points out that a high base effect from last September's service fee implementation offset improvements caused by site-wide marketing tools and incremental contributions from Cainiao advertising.
The latest financial report shows that for the second fiscal quarter (third calendar quarter), the China e-commerce group's adjusted EBITA was RMB 10.497 billion, down 76.3% year-on-year, mainly impacted by fast commerce investments.
Additionally, Morgan Stanley believes Cainiao's loss position is better than previously feared. The firm lowered its third fiscal quarter loss estimate for Cainiao from RMB 37 billion to RMB 25 billion, which is basically in line with expectations.
Execution has been better than expected, with Alibaba successfully achieving its previous target of halving unit economic losses, while GMV market share is estimated at 40% and order share remains stable.
Morgan Stanley believes Cainiao’s losses peaked in the second fiscal quarter, and expects them to narrow to RMB 25 billion in the third quarter. The firm estimates core e-commerce EBITA will be RMB 37 billion in the third fiscal quarter, a year-on-year decline of 40%. Total EBITA is estimated at RMB 32 billion, a year-on-year decline of 41%.
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The above highlights are from Zhuifeng Trading Desk.
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