Is Alibaba worth chasing at $140?

How does Alibaba make money with AI? Is it hype? 🤯

In today’s post, we will discuss the recent stock success of Alibaba (ticker BABA) - What caused the stock move 🚀 and my view on the stock right now 💡

Some discussion points in this post:

1. A brief background on what happened (what caused the stock move)

2. Comparing and contrasting China Cloud Industry vs US Cloud Industry

3. How can Alibaba participate in the AI era? What are Alibaba’s AI monetization strategies? Will they matter?

4. Is it worth chasing at this point? What are the risks to consider?

5. We will also share our valuation framework and target price for the stock.

As always, if you have enjoyed reading this post, please consider subscribing and sharing. Your engagement (likes, comments, sharing, restacking) is greatly appreciated. ❤️

$BABA has been on a tear… what happened?

Alibaba’s stock (ticker BABA) has gone up 65% year to day.

The bottom of the stock was around late January and early February. While at the same time, US AI/Tech stocks have suffered greatly.

If you recall, on January 27th, the deepseek news caused a lot of pain for US AI/tech stocks, and many stocks sold off by 10% or more on a single day. We published an in-depth analysis on deepseek and shared our thoughts on the US tech sector (semiconductors, software etc) here.

The difference in stock performance between US tech and China tech (BABA, Tencent) can be explained by positioning and rotation, as US tech stocks have done exceptionally well last year, while Chinese stocks have suffered due to sluggish economy. We are seeing a reversal here.

But more importantly, investors are piling into Chinese tech stocks (specifically BABA and Tencent) because they are seeing some hopes in AI.

Alibaba also had several AI announcements that greatly boosted investor sentiment.

1. Late January: deepseek gaining attention

2. January 29th: BABA launched Qwen2.5 language model

3. February 13th: Apple and Alibaba to partner on AI features

4. February 20th: At its Earnings Call: BABA announced massive capital expenditure (capex) plan for the next 3 years, demonstrating commitment to AI and Cloud infrastructure investment

Is this just hype, or is the market reaction justified? Let’s first go to back to the fundamentals.

$BABA Stock has gone up 73% in the last 6 months.

A brief overview of Alibaba’s Cloud business:

Many of you might have known Alibaba as an e-Commerce company.

Similar to Amazon, Alibaba started as an e-Commerce company. Even today, e-Commerce represents a meaningful part of the business (about 44% of total revenue).

It has invested in Cloud and is now the 4th largest cloud service provider globally, and the largest cloud service provider in China and in Asia.

Alibaba’s total revenue was 33.5B dollars in the last quarter. Cloud intelligence was $4.4B dollars, which represented 13% of BABA’s total revenue.

Taobao and Tmall (domestic e-Commerce business) is the largest segment at 44%

How does it compare with the other leading Cloud Services Providers?

• Amazon Web Services (AWS)’s cloud revenue was $28.8B last quarter.

• Microsoft Intelligence Cloud revenue was $25.5B last quarter.

• Google Cloud revenue was $12B last quarter.

• Alibaba cloud (AliCloud) revenue at $4.4B last quarter. It ranked No.4 globally and No.1 in China.

As we discussed in the Google primer and earnings recap post, Cloud migration is still in its early stage. Cloud migration in China is in an even earlier stage than the US.

In terms of growth, BABA’s Cloud Intelligence Revenue grew 13% year over year in the most recent quarter, still behind US peers (Microsoft Azure and Google Cloud grew more than 30% year over year in the most recent quarter).

This might be surprising to some people, as they would expect AliCloud to grow faster since law of large number typically penalizes larger companies.

However, there is fundamental difference between the cloud industry landscape in the US and that in China, which we will discuss in the section below.

The content below will be available for paid subscribers only. We will dive into the difference between the US Cloud industry and China Cloud industry, as well as Alibaba’s AI monetization strategies and the associated risks. Last but not least, we will share a valuation framework for BABA.