CMSC has released a research report expressing optimism about the long-term growth potential and profit improvement prospects of Alibaba's cloud and AI businesses. Considering increased investments in models like Qianwen and model training, the report forecasts Alibaba-W's (09988) non-GAAP net profit attributable to the parent company for FY2027-FY2029 to be 92.1 billion, 128.5 billion, and 168.5 billion yuan, respectively. Based on a valuation of 10x PE for the core e-commerce business (excluding flash sales losses) and 6-8x PS for the cloud business in FY2027, the corresponding target price is set at HKD 170-197 per share, maintaining a "Strong Buy" rating. CMSC's key viewpoints are as follows:
Alibaba reported its FY2026 Q4 results, with group revenue reaching 243.4 billion yuan, up 3% year-over-year, and a non-GAAP net profit of 86 million yuan, down 100% year-over-year. E-commerce revenue and profits remained stable this quarter, while Customer Management Revenue (CMR) growth slowed due to the impact of new marketing initiatives. Losses per unit economics (UE) for on-demand retail and food delivery continued to narrow, with the potential for UE to turn positive before the end of the new fiscal year. Cloud business revenue maintained accelerated growth, with rapid development in MaaS driving profit improvement. The cloud business margin is expected to improve significantly over the next 1-2 years. Given the anticipated acceleration in Alibaba Cloud's revenue growth and profit improvement, the "Strong Buy" rating is maintained.
E-commerce: E-commerce revenue and profits were stable in the March quarter, with CMR growth slowing due to new marketing initiatives. In FY2026 Q4, Customer Management Revenue was 730 billion yuan, up 1% year-over-year. The platform implemented a new marketing development plan for some merchants this quarter, treating certain subsidies as CMR deductions. Excluding this impact, CMR growth on a comparable basis was 8% year-over-year. On the profit side, Alibaba's China Commerce Group's adjusted EBITA was 24.0 billion yuan, down 40% year-over-year, with the e-commerce business EBITA remaining stable year-over-year. Looking ahead, the impact of the new marketing plan on CMR is expected to persist.
On-Demand Retail: UE losses continue to narrow, with potential to turn positive before the end of the new fiscal year. This quarter, Taobao Flash Sales saw significant growth in order volume and market share. Order volume from January to March was 2.7 times that of the same period last year, with non-food retail orders tripling. Regarding synergies, Flash Sales have contributed to user acquisition and engagement for Taotian and have driven the development of on-demand retail services like Hema and Tmall Supermarket in categories such as food and fresh produce. On the profit side, the on-demand retail and food delivery business has seen continuous optimization of UE, driven by improvements in order structure, logistics efficiency, and increases in Average Order Value (AOV). The company expressed confidence in achieving positive UE before the end of the new fiscal year.
Cloud and AI: Revenue growth accelerates, with significant margin improvement expected over the next 1-2 years. In FY2026 Q4, Cloud Intelligence Group revenue was 41.6 billion yuan, up 38% year-over-year, with external revenue growing 40% year-over-year. It is anticipated that Alibaba Cloud's external commercial revenue will continue to accelerate from the 40% base in the coming quarters, maintaining high growth in the medium to long term. AI business is developing rapidly, with AI-related product revenue reaching 8.971 billion yuan, representing triple-digit year-over-year growth. The annualized revenue from AI business this quarter has exceeded 35.8 billion yuan, accounting for 30% of Alibaba Cloud's external commercial revenue. It is projected that the AI contribution will exceed 50% within the next year. Demand for model and application services on the Bailian MaaS platform continues to rise. The annualized recurring revenue for MaaS is expected to exceed 10 billion yuan in the June quarter and is projected to surpass 30 billion yuan by the end of this year. The increasing proportion of this high-margin revenue is also expected to drive profit improvement. This quarter's adjusted EBITA was 3.8 billion yuan, up 57% year-over-year, with an EBITA margin of 9.1%. The company anticipates a significant improvement in Alibaba Cloud's gross margin over the next 1-2 years, with margin improvements also expected in the coming quarters.
Risk factors: Macroeconomic risks; intensifying industry competition; slower-than-expected development of AI technology.
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