Morgan Stanley: Acknowledges Underestimating Alibaba (09988) Increases Price Target to HK$ 174.9, Expects Revenue from Cloud Business to Double in the Next Three Years

Alibaba Group Holding Limited Sponsored ADR (09988) has seen a 65% increase in stock price since the beginning of the year. According to the latest research report by Morgan Stanley, they admit to underestimating the demand for artificial intelligence (AI) driving Alibaba's cloud computing and the resilience of its core business, Taobao and Tmall, stating that they "got it wrong". Morgan Stanley believes that the revenue of Alibaba's cloud intelligence business will double over the next three years. They have significantly raised the target price of Alibaba Group Holding Limited Sponsored ADR (BABA.US) from $80 to $180, and upgraded its rating from "in line with the market" to "hold". Morgan Stanley further points out that in an optimistic scenario, the value of Alibaba Cloud alone could reach $100 per share, with the entire Alibaba Group Holding Limited Sponsored ADR being valued at $300 per share. Based on the stock price of Alibaba Group Holding Limited Sponsored ADR in Hong Kong, the latest basic target price given by Morgan Stanley is approximately equivalent to HK$174.9, with an upper valuation of HK$291.5 per share. Morgan Stanley admits to two major errors in their previous analysis of Alibaba. Firstly, they did not anticipate the significant acceleration of Alibaba's cloud business growth since the beginning of this year. Morgan Stanley now predicts that cloud business revenue will grow by 18% in the fourth quarter of the 2025 fiscal year (January to March), with a further increase of 25% in the 2026 fiscal year. Morgan Stanley forecasts that with Alibaba's announcement of capital investment of over 300 billion RMB in cloud and AI infrastructure over the next three years, Alibaba Cloud's revenue will climb from 118 billion RMB in the 2025 fiscal year to 240 billion RMB in the 2028 fiscal year, achieving a doubling in revenue over three years. Benefiting from economies of scale, Morgan Stanley believes that Alibaba Cloud's EBITDA profit margin will increase from 20% this fiscal year to 35% in three years. However, due to increased depreciation expenses, the EBITA profit margin for the fiscal years 2026 to 2028 will decrease from the originally forecast 10%-12% to 5%-8%. Morgan Stanley also admits to underestimating the resilience of the Taobao business. Despite weak domestic consumption and intense industry competition, the Taobao business has not been as fragile as feared by the market. Supported by higher commission rates, the group is expected to continue investing in the Taobao business, with future quarterly gross merchandise volume (GMV) increasing by 3%-5% and EBITA profit remaining stable. Regarding the calculation of the $300 upper valuation for Alibaba Group Holding Limited Sponsored ADR, Morgan Stanley stated that the latest basic scenario target price of $180 is calculated by discounted cash flow (DCF), equivalent to a forecast P/E ratio of 16.6 times in the 2027 fiscal year, while the original target price corresponds to a 13.6 P/E ratio in the 2026 fiscal year. Through a sum-of-the-parts (SoTP) calculation, Morgan Stanley estimates that the core Taobao group of Alibaba Group Holding Limited Sponsored ADR is worth $90 per share (reflecting a 10x P/E ratio), the cloud business is worth $60 per share (reflecting an enterprise value-to-sales ratio of 5x), and the remaining business is worth $50 per share, totaling $200. In the upper valuation scenario, Morgan Stanley estimates that the Taobao group is worth $120 per share (reflecting a 12x P/E ratio), the cloud business is worth $100 per share (reflecting an enterprise value-to-sales ratio of 7x), and the remaining business is worth $80 per share, totaling $300. In addition to being optimistic about Alibaba Group Holding Limited Sponsored ADR, Morgan Stanley has also upgraded its investment rating for Chinese internet stocks from "in line with the market" to "attractive," with Tencent (00700) as their top pick in the industry, along with Meituan (03690), PDD Holdings Inc. Sponsored ADR Class A (PDD.US), and JD.com, Inc. Sponsored ADR Class A (09618).