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Undervalued relative to technological capabilities

Positive medium/long-term outlook intact; retain Buy rating and TP of HK$142

We maintain our Buy rating and target price of HK$142 on Alibaba. While costs tied to quick commerce will likely pressure near-term earnings, synergies with existing e-commerce operations are already visible, and related earnings should improve over time as scale effects materialize. Meanwhile, Alibaba has released and open-sourced frontier-level foundation models, and it is reportedly developing its own AI inference chip. While these technological developments should have a limited impact on near-term earnings, they have the potential to enhance corporate value over the medium to long term. Shares could remain volatile in the short term due to the slow pace of the earnings recovery, but we believe the stock appears undervalued relative to the firm’s world-class technological capabilities.

As the AI chip reportedly under development is still in the testing stages, its performance remains to be seen. That said, inference chips have relatively low entry barriers, and recent market developments―such as Nvidia’s move to provide CUDA support for RISC-V?based chips developed by Chinese firms, along with improving results at companies like Cambricon―suggest meaningful potential. With the current semiconductor shortage constraining cloud revenue growth, broader availability of Chinese-made chips could accelerate growth in Alibaba’s cloud intelligence business.

Earnings review: Cloud strength vs. widening e-commerce losses

For 1QFY26 (ended Jun. 30, 2025), revenue grew 2% YoY (10% YoY excluding revenue from divested businesses). However, higher logistics and marketing expenses tied to the expansion of quick commerce offset reduced losses in international digital commerce and growth in the cloud intelligence segment, leading to a 14% YoY decline in EBITA. By business, China e-commerce revenue rose 10% YoY, but EBITA fell 21% YoY. International digital commerce revenue climbed 19% YoY, and the business moved closer to breakeven. Cloud intelligence revenue exceeded expectations, rising 26% YoY, and EBITA margin improved to 8.8%.

During the conference call, Alibaba said that the quick commerce segment was delivering results faster than expected. While the business is incurring initial losses due to spending on marketing and logistics, management expects profitability to improve over the medium/long term as economies of scale and customer mix improvements take hold. The firm also emphasized that quick commerce creates strong synergies with its broader e-commerce business, and it plans to continue investing in the segment.