Morgan Stanley keeps Alibaba Group Holding as its top pick, with the investment focus shifting from narrowing QC losses to AI and cloud growth

Overview

This is a Morgan Stanley company research preview on Alibaba Group Holding's 4QF26 results. The core view is that market attention is shifting from QC losses to AI investment returns and a re-acceleration in cloud business. The report lists BABA as a Top Pick, reiterates Overweight, and maintains the US$180 target price. Near-term profits are weighed down by Qwen promotion, model training, and a wider All Others loss, but the analyst believes cloud revenue, MaaS, core e-commerce monetization, and narrowing QC losses form a more important medium- to long-term investment thesis.

Core views

First, cloud growth momentum remains strong; 4QF26 is expected to grow 40%+ YoY, and F27 is likely to accelerate further to 45%, benefiting from a surge in token usage, recent cloud price increases, and higher long-term MaaS contribution. Second, core e-commerce CMR is expected to grow 7% YoY on a comparable basis, with consumption improvement driving a recovery in monetization, but accounting changes will reduce reported growth to about 1%. Third, the QC loss path is clearer: 4Q is expected to post an Rmb18bn loss, F27 an Rmb43bn loss, and management's goal is to halve losses in F27 versus F26, halve them again in F28, and reach profitability in F29. Fourth, higher AI-related investment expands All Others losses, expected at Rmb20bn in 4Q and Rmb70bn in F27, which is the main reason for the near-term downward revisions to earnings forecasts.

Analysis framework

The report combines earnings preview, segment-level operating decomposition, risk-reward scenarios, and DCF valuation. On the operating side, the focus is on cloud, CMR, QC, and All Others; on valuation, DCF is the main method, with target F28e non-GAAP P/E of 23x used as a cross-check; the risk-reward framework presents bull, base, and bear cases corresponding to faster revenue growth, steadier margins, or higher investment and competitive pressure.

Methodology notes

• Valuation methodsDCF

  Discounted cash flow valuation

  Morgan Stanley uses DCF as its primary valuation method to reflect Alibaba Group Holding's long-term earnings and free cash flow outlook; key assumptions include a 10% WACC and a 3% perpetual growth rate.

• Rating systemOverweight

  Relative Overweight rating

  Morgan Stanley's Overweight indicates that over the next 12-18 months, the stock's total return is expected to be higher on a risk-adjusted basis than the average total return of the analyst's coverage universe.

• Scenario analysisRisk Reward

  Risk-reward scenario framework

  The report evaluates the impact of revenue growth, EBITA growth, net cash discount, and valuation multiple changes on the target price through bull, base, and bear scenarios.

Asset mapping & comparison

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

• BABA.N / 09988.HK

  Core coverage name; Alibaba Group Holding equity/ADR

  Strengths

  One of China's largest cloud infrastructure players, benefiting from GenAI adoption, higher token usage, long-term MaaS growth, improved core e-commerce monetization, strong cash flow, dividends, and ongoing buybacks.

  Weaknesses

  Higher Qwen promotion and model training costs widen All Others losses, putting near-term pressure on consolidated EBITA; accounting changes depress reported CMR growth.

  Comparison

  The report says the US$180 target price implies an F28e non-GAAP P/E of 23x, above the current roughly 16x; base-case revenue CAGR for F25-28e is 6%, bull case 8%, and bear case 4%.

  Risks

  Higher-than-expected reinvestment costs, intensifying core e-commerce competition, weaker-than-expected consumer recovery, slower enterprise digitalization, and tighter internet platform regulation.

• Alicloud

  Main growth engine and AI beneficiary business

  Strengths

  4QF26 growth is expected to be 40%+; F27 is expected to be 45%; cloud price increases and higher MaaS contribution are likely to continue supporting revenue.

  Weaknesses

  AI infrastructure and model training investment may create cost pressure.

  Comparison

  Cloud growth was 36% in 3Q, and is expected to accelerate to 40%+ in 4Q.

  Risks

  Slower enterprise digitalization, intensifying cloud competition, or AI demand below expectations.

• Qwen

  Focus area for AI applications and model investment

  Strengths

  The Qwen 3.6 upgrade enhances agentic coding capabilities and may drive ecosystem and token usage.

  Weaknesses

  Spring Festival promotion and model training spending increase All Others losses.

  Comparison

  The report views Qwen promotion as one of the main reasons for the quarter-on-quarter widening of All Others losses in 4Q.

  Risks

  Long payback period, commercialization slower than expected, and continued increases in training costs.

Key data

• RatingOverweightThe report reiterates OW, and Alibaba Group Holding remains the Top Pick.
• Target priceUS$180The DCF-derived target price is unchanged, implying an F28e non-GAAP P/E of about 23x.
• Cloud revenue growth4QF26 40%+ YoY; F27 expected 45%Driven by higher token usage, cloud price increases, and MaaS.
• Cloud EBITA margin9%Expected to be flat versus 3Q.
• CMR growth7% YoY on a comparable basis; about 1% in reported termsAccounting changes create about a 6 percentage point impact.
• QC losses4QF26 expected Rmb18bn; F27 expected Rmb43bnManagement targets F27 losses to be halved versus F26, and halved again in F28.
• All Others losses4QF26 expected Rmb20bn; F27 expected Rmb70bnMainly driven by Qwen promotion and model training investment.
• Consolidated EBITARmb4.5bn, down 86% YoYProfit pressure mainly comes from the widening All Others loss.
• Estimate revisionsF26 adjusted EBITA cut by 7%; F27 cut by 12%Mainly reflects higher AI-related investment and rising All Others losses.
• DCF key assumptionsWACC 10%; perpetual growth rate 3%The report says the key assumptions are unchanged.

Impact & implications

For investors, the main implication of the report is that Alibaba Group Holding's valuation debate is shifting from short-term QC losses and profit pressure to cloud growth and long-term earnings leverage driven by AI investment. In the near term, Qwen promotion and model training costs will depress EBITA and widen All Others losses; over the medium to long term, if Alicloud growth stays at 40%+ and further accelerates in F27, MaaS revenue contribution rises, and QC losses narrow as planned, then AI investment could become the core variable supporting the target price and valuation re-rating.

Risks

• Higher-than-expected reinvestment costs, especially AI, Qwen promotion, and model training spending.
• Intensifying core e-commerce competition may weigh on CMR and e-commerce EBITA.
• Consumer recovery slower than expected, affecting growth in China's core e-commerce revenue.
• Slower enterprise digitalization, dragging on the re-acceleration of cloud revenue.
• Increased regulatory scrutiny on internet platforms.
• A larger-than-expected widening of All Others losses, leading to further earnings estimate cuts.

What to watch

• Whether Alicloud revenue can maintain 40%+ YoY growth and accelerate to 45% in F27.
• Whether MaaS revenue contribution can move toward the report's long-term expectation of more than 50%.
• Token usage, developer adoption, and commercialization progress after the Qwen 3.6 upgrade.
• The gap between CMR growth on a comparable basis and reported growth, and whether accounting impacts persist.
• Whether QC losses can be halved in F27 versus F26, as management targets, and then halved again in F28.
• Whether All Others losses retreat from the Rmb20bn level in 4Q or continue to widen because of model training.
• Core e-commerce monetization rate, non-GAAP EBITA margin, and the pace of dividends and buybacks.