Alibaba AI Cloud Margin Expected to Rise to 11-12%; Maintain Buy with TP of USD 207

Overview

This report summarizes key takeaways from Alibaba management's discussions at the Nomura Asia Investment Forum (NIFA). Nomura maintains its Buy rating and USD 207 target price on Alibaba, based on the view that the company's full-stack AI capabilities are accelerating revenue and profit growth in its cloud business. Meanwhile, loss reduction paths for businesses such as Instant Retail are becoming clearer. Despite near-term competitive pressures in domestic e-commerce, the overall earnings structure is expected to continue optimizing.

Core views

AI and Cloud businesses were the core highlights of the discussion. Management explicitly stated that large language models, cloud infrastructure, and T-Head's self-developed chips form the cornerstone of Alibaba's full-stack AI capabilities. Commercially, the most cutting-edge Qwen models will remain closed-source, with near-term monetization focused on B2B AI agents (e.g., Qoder, DingTalk Wukong, Accio Work), which offer a clearer monetization path than consumer applications. AI-related products currently account for 30% of external cloud revenue and have seen triple-digit growth for 11 consecutive quarters; this proportion is expected to rise to 50% within a year. More importantly, driven by a higher mix of high-margin MaaS (Model-as-a-Service), contract price increases, and cost advantages from self-developed chips, cloud margins are expected to expand to 11-12% within the next two quarters, with a long-term target of 20%. E-commerce and new businesses showed divergent trends. Domestic e-commerce EBITA may continue to fluctuate due to an unfavorable macro environment and intense competition. However, B2B businesses (1688 and Alibaba.com) are growing well, and international e-commerce has entered a profitability track, partially offsetting domestic pressure. The profitability timeline for Instant Retail (QC) has been clarified: management expects losses to halve annually in FY27 and FY28, reaching profitability in FY29, driven by order mix optimization (increasing non-food, high-value categories), improved fulfillment efficiency, higher take rates, and a stabilizing competitive environment. Additionally, losses in the 'Other Businesses' segment, widened by marketing spend for the Qwen App during the Spring Festival, are expected to narrow in the June quarter. However, as user activity increases, rising token costs may prevent losses from simply reverting to previous baseline levels.

Analysis framework

In this report, Nomura's analysis primarily follows the thread of 'AI Tech Stack → Cloud Financial Performance → Group-wide Earnings Restructuring.' First, it confirms the completeness and differentiation of Alibaba's AI capabilities through management's exposition on the trinity of LLMs, infrastructure, and self-developed chips. Next, it maps technological advantages to cloud revenue structure (rising AI share) and margin drivers (MaaS premium, price hikes, chip cost reduction) to form quantifiable financial expectations. Finally, combining the profit/loss cadence of each business segment (e-commerce under pressure, QC loss reduction, international/B2B filling gaps), it assesses the certainty of overall group earnings recovery. This analytical framework—from technological moats to financial realization, and then to multi-business portfolio balance—helps determine when AI investments will truly translate into shareholder returns.

Methodology notes

• Valuation MethodologySOTP Valuation

  Valuing different business segments independently using appropriate valuation multiples and summing them up

  Nomura values China Commerce at 5x FY27F P/E, Alibaba Cloud at 7x FY28F P/S, and uses NAV for non-core assets, summing to a USD 207 target price. This method is suitable for conglomerates with diverse businesses at different growth stages and profit models, avoiding the masking of high-growth segment value by a single multiple.

• Company Fundamentals & Financial FrameworkEarnings Quality Analysis

  Distinguishing structural margin differences across revenue sources

  The report emphasizes that MaaS (Model-as-a-Service) has structurally higher gross margins than traditional IaaS because it sells intelligence rather than just compute/storage; meanwhile, new models have better economics than older ones. This analysis helps investors understand that cloud margin expansion is not solely driven by scale effects but is a sustainable improvement driven by revenue quality upgrades.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Judging industry cycle sustainability via supply constraints and demand strength

  Management noted strong AI cloud demand that supply cannot meet, describing it as an industry-wide issue likely to persist for years. This judgment of supply-demand imbalance supports expectations for accelerated cloud growth and pricing power, serving as a key premise for evaluating the ROI cycle of AI infrastructure investments.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Alibaba (BABA.US / 09988.HK)

  Core Beneficiary: Full-stack AI capabilities driving cloud margin expansion; clear loss reduction path for Instant Retail; B2B and international businesses providing profit buffer

  Strengths

  Rapid growth and rising share of AI product revenue; structurally high MaaS margins; cost reduction from self-developed chips; high cloud customer stickiness and migration friction; clear QC profitability timeline

  Weaknesses

  Domestic e-commerce EBITA remains volatile due to macro and competitive factors; unclear monetization path for consumer AI apps; Qwen App token costs rising with DAU growth

  Risks

  Increased investment leading to margins missing expectations; regulatory risks in payments and internet finance potentially impacting core business and Ant Group value

Key data

• AI Products Share of External Cloud Revenue30%Maintained triple-digit YoY growth for past 11 quarters; expected to rise to 50% within one year
• Cloud Margin Target11-12% (Next Two Quarters) / 20% (Long-term)Driven by higher MaaS mix, price hikes, new model economics, and T-Head chips
• Instant Retail FY26 Total LossesCNY 86bn (Nomura Est.)Expected to halve annually in FY27/FY28, reaching profitability in FY29
• T-Head Chip Shipments~560k units (as of April)Increased from 470k cited earlier in the year; mostly serving external customers via Alibaba Cloud
• Target Price Implied ValuationCY27F P/E 21xCurrently trading at 12.5x, implying significant re-rating potential

Impact & implications

For Alibaba, AI is no longer just a technological narrative but is reshaping the revenue structure and profitability of its cloud business, providing fundamental support for a valuation re-rating. A clearer profitability timeline for Instant Retail also helps alleviate market concerns about 'burning cash for growth.' However, continued volatility in domestic e-commerce EBITA means group profits will still rely on improvements in cloud and non-core businesses for balance in the near term. Investors should monitor the alignment between AI monetization pace and domestic consumption recovery.

Risks

• Increased investment intensity may lead to downside risk in margins
• Regulatory risks in payments and internet finance sectors could impair core business and Ant Group value

What to watch

• Changes in the share of AI-related products in external cloud revenue
• Whether cloud margins expand to 11-12% within two quarters as scheduled
• Whether quarterly loss narrowing in Instant Retail aligns with FY27 halving expectations
• Dynamic balance between Qwen App DAU growth and token costs
• Stabilization of domestic e-commerce EBITA post-618 promotion