J.P. Morgan: Alibaba Cloud profit to surpass AI spending for the first time; maintains "Overweight" rating on BABA-W (09988) with a target price of HK$195

J.P. Morgan released a research report maintaining its "Overweight" rating on Alibaba (09988), lowering the Hong Kong stock target price from HK$205 to HK$195 and the US stock target price to US$200. The bank expects Alibaba to reach a key inflection point in the upcoming December quarter, with its cloud business operating profit surpassing losses from AI model and application development for the first time, marking the beginning of AI investments becoming self-funding rather than relying solely on group subsidies. The report noted that although the AI lab and application division still recorded a loss of approximately RMB 10 billion in the quarter ended September, it is expected that in the December quarter, with cloud business revenue growing over 50% year-on-year and operating margins continuing to improve, cloud business profitability will be sufficient to cover AI-related expenses. This "crossover point" is viewed as the first hard indicator validating AI investment returns and will be the core focus for the market over the next one to two quarters. On the e-commerce side, J.P. Morgan expects customer management revenue (CMR) to grow approximately 1% year-on-year in the quarter ended September, similar to the previous quarter, while Taobao and Tmall Group's operating profit will be flat year-on-year, indicating that competitive pressure has marginally eased. Quick Commerce losses are estimated at RMB 9.2 billion, far below RMB 35 billion a year earlier, demonstrating a credible path toward narrowing losses without sacrificing market share. The report lowered Alibaba's revenue forecasts for fiscal years 2027 and 2028 by 2% and 6% respectively, mainly due to downward revisions to "other business" revenue and adjustments to the cloud business revenue calculation framework. Meanwhile, due to lower revenue and adjustments to non-operating items, adjusted earnings per share (EPS) forecasts for the same periods were cut by 9% and 10%. The bank noted that the above target price equates to 17x forward P/E for fiscal year 2028, up from 16x previously, reflecting that the cloud and AI profit crossover point reduces the risk in the earnings trajectory. The bank believes the market has not yet fully reflected the December quarter inflection point where cloud profitability surpasses AI spending, as well as the potential for cloud business revenue growth to sustain above 50% in fiscal year 2028. The report expects that while the September quarter provided evidence for investors, the market may need another two to three quarters to be fully convinced. The report also listed key risks, including competitive threats to Alibaba's local services business from large internet companies such as TENCENT (00700) and BIDU-W (09888), potential long-term profit pressure from the longer payback period of digital content investments, and slower-than-expected mobile monetization progress affecting the long-term growth momentum of China's retail market.