J.P. Morgan: Alibaba Cloud's current profit margin may underestimate its profitability in the mature stage, with ROIC expected to approach 20%.

On August 21, JPMorgan Chase pointed out in its latest research report that Alibaba Cloud's current profit margin of approximately 12% may not fully reflect the earning potential of its AI infrastructure as it enters a mature operational phase. JPMorgan believes that over the past few quarters, Alibaba has continuously increased its capital expenditures, with a large number of GPU and data center assets recently coming online. Currently, the overall utilization is still in the ramp-up stage, with the utilization rate of some newly added assets around 60%. At this stage, the ROIC (Return on Invested Capital) for newly invested assets in their first year is approximately 6%, significantly lower than nearly 20% in the mature operational phase. Based on vintage models calculating various batches of assets, JPMorgan believes that even if future capital expenditures remain relatively stable and unit economics do not improve further, as early invested assets gradually mature and utilization rates continue to increase, the overall weighted ROIC of AI infrastructure is expected to rise from the current level of around 6% to nearly 16%, and may further approach 20% in the mature phase. Under this assumption, as the utilization efficiency of existing computational assets improves, Alibaba's AI infrastructure's net free cash flow is projected to cross the breakeven point around the third year post-investment. JPMorgan believes this is also key to understanding Alibaba's current AI investment cycle: short-term profit margins are impacted by the underutilization of a large number of newly added computational assets, but as these assets gradually mature, there remains further room for the profit margin and capital return rate of its cloud business to be released.