Summary

• Alibaba's Q3 FY 2025 earnings exceeded expectations, with net income of 48.945 billion yuan and operating income margins reaching 16.91%, indicating strong financial performance.

• The Cloud Intelligence Group and AI segment saw significant growth, driven by continually increasing AI adoption in China, positioning Alibaba to benefit from this trend.

• Alibaba's international segment (AIDC) continues to be a key driver of revenue growth. It is likely to turn profitable in two quarters, from an adjusted EBITDA margin of -13%.

• Valuation analysis suggests Alibaba is undervalued, with a potential upside of 18% to 20%, supported by historical and comparative metrics, and technical analysis indicates a breakout.

• I recommend a strong buy for Alibaba with a price target of $153, expecting the stock to reach this within 6-9 months, driven by AI and cloud investments.

Brief/Overview

Alibaba is a Chinese multinational retail, e-commerce, Internet and technology company founded by Jack Ma. The company is headquartered in Hangzhou, China.

For a long time, Alibaba has been seen as undervalued by famous investors such as David Tepper, Michael Burry and many others who have been holding Alibaba for a few quarters, as well as multiple authors on this platform.

In this article, I argue by presenting fundamental tailwinds and technical analysis to demonstrate how Alibaba's time to go from its currently undervalued price to a fair valuation is finally here. I would also like to disclose early on in this article that I have purchased a few shares of BABA over the last couple of weeks.

Thesis

Earnings: Q3 Financial Year 2025

Alibaba stock had risen sharply since its earnings were announced before the US market opened on Thursday, February 20th. The net income came in at 48.945 billion yuan against expectations of 40.6 billion yuan, as earnings more than tripled from 14.433 billion yuan in Q3 FY 24.

Alibaba’s operating income crossed the $6 billion mark for the first time since the quarter ending June 2023. The company is showing not just earnings growth but also a re-acceleration in the rate of earnings growth. Additionally, its operating income margins of 16.91% were also the highest since the quarter ending June 2023.

Cloud Intelligence Group and AI

Alibaba’s Cloud business was a major contributor to overall revenue growth as the segment’s growth re-accelerated back into double digits. The cloud business grew revenues at 13%, whereas its adjusted EBITDA grew 33%.

Unsurprisingly, the main reason for such growth was Chinese businesses adopting AI tools, which drive cloud segment revenues. In the last twelve months, 72% of respondents to a survey conducted in Mainland China reported their business used AI tools, marking three consecutive years of increased AI adoption. AI adoption at the workplace in China seems to be stronger than in the rest of the world, as 29% reported using AI all the time. Surveys conducted by the US Census Bureau as well as Deutsche Bank report extensive AI adoption at the workplace in the United States remains at about 5%. Another survey of Chinese companies showed 87% of the respondents were looking to ramp up AI-related investments into their business. Yu Yi, Accenture China’s leading expert on technology, said that companies are increasingly turning to state-of-the-art AI technologies (especially generative AI) to boost their innovation efforts.

I believe Chinese businesses are currently where American businesses were two years ago when ChatGPT propelled generative AI into the mainstream. Similarly, I think DeepSeek (DEEPSEEK) propelled generative AI into the mainstream when it came to the Chinese market. Like China always does, it will start from behind the USA when it comes to technological adoption and development but grow faster than the American market as it eventually catches up to global standards. Just like cloud businesses in the US (Azure/AWS/Google Cloud) grew quickly alongside expanding margins on the back of the AI wave in the West, I would expect that to be replicated in China, and Alibaba is poised perfectly to be a big benefactor of that. Additionally, due to the business and financial characteristics of the cloud business and its growing faster than the other segments, it would also lead to overall margin expansion on the company's income statement.

Now, let's tackle the major issue at hand—Alibaba's AI LLM, Qwen 2.5 Max. On January 28th, Qwen’s X/Twitter account announced the launch of Qwen 2.5 Max, a large Mixture of Experts (MoE) Language-Learning Model with the below image. Qwen claims that the 2.5 Max beats the much-hyped DeepSeek-V3, Meta’s Llama 3.1-405B, GPT-4o-0806, and the Claude-3.5-Sonnet-1022 on metrics/tests/benchmarks such as the MMLU-Pro, Arena-Hard, GPQA-Diamond, LiveCodeBench and the LiveBench. As of right now, based on LM-Arena’s leaderboard, Qwen is the 8th best AI LLM. This rank is better than the Gemini 2.0 Flash, Grok-2-8-13, and many other models.

Qwen via X

LM Arena leaderboard

While the LM Arena leaderboard rankings are based on votes, Artificial Analysis’ scores are based on more objective measures. The Artificial Analysis Intelligence Index places Alibaba’s Qwen 2.5 Max model in the most desirable or the most attractive quadrant. The Qwen 2.5 Max is placed moderately well within the quadrant.

Artificial Analysis Intelligence Index

I think there is a lot more room for improvement on both factors (price and intelligence) for Alibaba’s Qwen before it can compete with American rivals such as Gemini 2.0 Flash and the Llama 3.3 on price. Cutting prices down and commoditizing products and technologies is really what Chinese companies specialize in, and I would expect future Qwen models will perform better on intelligence and price and move closer to the top left region. This should be facilitated by Alibaba’s commitment to invest $53 billion in cloud computing and AI over the next three years.

That is also the pattern of production observed with any new technology. This was hypothesized and captured brilliantly in Posner's Imitation Lag Hypothesis, as shown in the below image. There are several examples of this—talk about manufacturing shifting over the years, moving to developing Asian economies, or services all the way from BPOs to high-end IT services moving to India, or more recently, how China's BYD has improved tremendously to become the biggest EV selling brand. I would expect similar patterns to show up in the case of AI/LLM-related services. In the AI cycle, China seems to be where the United States was in late 2022/early 2023. As China plays catch-up to the West, Alibaba will likely grow at a faster rate than western companies. They'll first address their domestic markets (alongside improving continuously) and once price can be reduced enough to compromise a little on higher intelligence that may be provided by companies in the US, Alibaba could become a big exporter of Cloud and AI/LLM services to the entire world.

Theories of International Trade and Competitiveness | SpringerLink

International Expansion—AIDC Segment

While I had to address the Cloud/AI growth like everyone else will, there is another driver of revenue growth for Alibaba that might be going unnoticed, which is the Alibaba International Digital Commerce (AIDC) group. Within the international commerce segment, the wholesale segment (a sixth of AIDC) grew at 18%, whereas the international retail segment grew at 36%, meaning the overall AIDC group revenue grew at 32%, or 9240 million RMB from 28,516 RMB to 37,756 RMB.

The contribution of AIDC to total company revenues grew from about 11% in the same quarter last year to a little over 13% in the most recent quarter. AIDC was crucial to overall revenue growth as it accounted for nearly 46% of the revenue growth of 19,806 RMB. So clearly the AIDC segment is crucial in powering growth for Alibaba.

I would expect this segment to be an outperformer (compared to the other segments). In the previous quarter, the company announced the formation of a JV to begin AliExpress operations in South Korea. I would also expect the company's investments in select European and Gulf markets to start paying off slowly. The company is also looking to integrate with domestic companies in some of the targeted international markets in order to expand their services and grow organically in these markets. The management also feels that the path to profitability for the international business is clearer right now, and they expect the AIDC segment to become profitable in FQ 1 2026 (March-June 2025).

It would not surprise me if within the next few quarters or years, Alibaba has expanded to and gained significant market share within countries in the East Asian region. That's precisely the reason I've invested in Alibaba stock, and I'm committed to it for the long term.

Valuation—Technical Analysis, Historical Valuations

While Alibaba’s closest comparable is probably Amazon, and we may find other comparable companies in the US or across the world, China is a unique economy to be operating in with its tight set of regulations and other risks. For that reason, I have chosen to go ahead with the historical valuations approach for Alibaba.

S&P Capital IQ

The above image shows various valuation multiples for Alibaba (as of 24th February) and the average for their valuation multiples since 2015. Alibaba’s EV/sales multiples based on the past suggest an upside of 200%. Even the company’s EV/EBIT or EV/EBITDA metrics suggest that the company is trading at nearly half of its fair value.

I understand these multiples may present a bloated picture. At Alibaba’s all-time highs of about $320 in October 2020, the company had an EPS of about $8-$8.5, so a P/E of ~40. Based on the 9 months so far and consensus estimates for Q4 Financial Year 2025, Alibaba would have a net income of $8.55 per share. While I’m not saying this should warrant a P/E of 40, like it did in the post-COVID bull market of 2020-21, even a rational P/E of 18 would mean the fair value of Alibaba would be $153, around 18% above the closing price on 24th February 2025.

I could also compare Alibaba directly to Amazon and put a harsh 40% discount on the same valuation metrics to account for lower growth and risks specific to its operations in China and the implications for global linkages (because of it being based in China), such as possible restrictions to import goods or technology from China. Even after this harsh 40% discount on valuations, Alibaba should be worth 20% more than it is today, at about $156/share.

S&P Capital IQ

I would now move away from fundamental analysis towards technical analysis to see whether Alibaba is actually likely to move towards our fair value estimates of over $150. The first exhibit I have is Alibaba’s monthly candlestick chart. The red boxes show the accumulation phase, described in Dow Theory. We also see the blue dotted horizontal line, which has been a strong resistance on a monthly closing basis. Alibaba’s price has also broken above the horizontal resistance line as well as trendline resistance on strong volume of over 700 million in February, the highest since June 2022, with still a few trading days to go in the month.

TradingView Data

The next exhibit is Alibaba’s weekly candlestick chart (below). Yet again, we see here that Alibaba has broken above the trendline resistance as well as the 200-week moving average with strong volumes of over 200 million in the last two weeks, the highest since March 2023. The measured move out of the chart pattern would be about $60, and the resulting move would take Alibaba’s price to nearly $165-$170 per share.

TradingView Data

Conclusion

I conclude this report with a strong buy call on Alibaba as it faces strong tailwinds of increasing AI adoption. While the stock sold off on Monday on news of further investment of $50 billion in three years into cloud computing and AI capabilities, I would say it was merely a shakeout to remove the weak buyers, and the stock is headed much higher. I am also placing a price target of $153 based on both fundamental analysis measures. Considering the strength of this move based on technical analysis, I would expect Alibaba to achieve this target fairly quickly within a time horizon of 6-9 months. I would also say that this move seems very early (out of the accumulation phase and breakout of the 200-week MA) in what could be a big long bull market for Alibaba stock. I look forward to the next earnings report for Alibaba and consequently re-visiting and re-evaluating this report and updating my stance on BABA shares.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.