Alibaba's AI Surge: Why the Market is Missing BABA's Cloud Gold
Table of Contents:
- Introduction: Unpacking BABA's AI & Cloud Potential
- Beyond the Headline: Core Financials & Underlying Growth
- Cloud Intelligence Group's Resurgence: An AI-Powered Acceleration
- Alibaba's AI Ecosystem: A Strategic Investment Play
- The Undervaluation Thesis: Cloud as a Hidden Gem
- Acknowledging Skepticism and Navigating Risks
- Conclusion: A "Buy" Rating Reaffirmed
Introduction: Unpacking BABA's AI & Cloud Potential
NEW YORK, NY – June 19, 2025 – Despite a recent period of market skepticism and a seemingly muted reaction to its latest financial disclosures, Alibaba Group Holding Limited (NYSE: BABA) is quietly positioning itself as a formidable force in the Artificial Intelligence (AI) and cloud computing landscape. An in-depth analysis suggests that beneath the surface of top-line misses, Alibaba's strategic investments in AI and its accelerating cloud business indicate a strong turnaround and significant long-term potential that the broader market might be underestimating.
It's important to note that this article is based on a detailed analysis of the Seeking Alpha article "Alibaba: AI Tiger Roars, Market Snores" published on June 19, 2025. Due to accessibility issues, content from other proposed sources could not be incorporated.
Beyond the Headline: Core Financials & Underlying Growth
While Alibaba's Q4 FY2024 fiscal results showed an EPS miss of approximately 2.4% and a top-line miss of 1.55% against initial market expectations, a closer look at the adjusted financials reveals a more robust picture. The company's actual sales grew by a respectable 7% year-over-year (YoY), with EPS expanding by about 24.3% YoY, signaling promising signs of a turnaround.
More impressively, when adjusted for the recently disposed Sun Art and Intime businesses, Alibaba's consolidated revenue actually surged by 10% YoY. The group's adjusted EBITDA witnessed an even more significant expansion, soaring by 36% YoY. Within its core commerce segments, the Taobao Tmall Group (TTG) saw its customer management revenue (CMR) climb by 12% YoY in Q4, driven by improving take rates and increased penetration of Quanzhantui. The expanding base of 88VIP members, now surpassing 50 million, further underscores growing customer loyalty and value.
Alibaba International Digital Commerce (AIDC) also demonstrated strong performance, with sales increasing by 22% YoY. Despite global trade tensions and AIDC's 30-40% tie to U.S. sales, management projects the segment to achieve overall quarterly profitability in the upcoming fiscal year, confident in its ability to transfer costs and find alternatives for American customers.
Cloud Intelligence Group's Resurgence: An AI-Powered Acceleration
A crucial factor often overlooked by market skeptics is the remarkable resurgence of Alibaba's Cloud Intelligence Group (CIG). Previously a source of concern due to slowing growth, CIG's revenue growth accelerated to 18% on a YoY basis in Q4. This turnaround is largely attributed to the burgeoning demand for AI-related products, which are now boasting triple-digit year-over-year growth rates and significantly boosting CIG's consolidated performance. This acceleration strongly indicates that past cloud growth concerns are now likely resolved, paving the way for sustained expansion.
Alibaba's AI Ecosystem: A Strategic Investment Play
Alibaba's strategic vision extends far beyond its own cloud offerings; it is actively cultivating a broad and influential AI ecosystem through significant investments in promising "AI tigers." The recent news surrounding MiniMax, an Alibaba-backed Chinese AI startup, highlights this strategy. MiniMax is reportedly considering an IPO in Hong Kong, potentially this year, following a last funding round that valued it at over $2.5 billion.
MiniMax is part of a new wave of Chinese AI innovators, including Moonshot AI, Baichuan, and Zhipu AI. Notably, Alibaba also backs Zhipu AI, which is reportedly preparing for its own IPO, further solidifying Alibaba's stake in the future of Chinese AI. MiniMax recently announced its new M1 model outperforming all closed-source Chinese competitors in complex productivity scenarios and even DeepSeek’s R1-0528 model. Their advancements also include upgrading their text-to-video model behind Hailuo AI video editor and the AI companion app Talkie, which competes with Character.AI in the U.S.
Beyond these high-profile "tigers," Alibaba Entrepreneurs Fund has strategically invested in 99 companies as of February 2024, yielding impressive results including 3 unicorns, 4 IPOs, and 2 acquisitions. This extensive venture portfolio broadens Alibaba's valuable asset base and provides crucial insights into cutting-edge AI developments.
Collectively, Alibaba, along with ByteDance and SenseTime, commands over 50% of the Generative AI (GenAI) market in China, mirroring the oligopolistic structure seen in the U.S. cloud market dominated by AWS, Azure, and GCP. With Morgan Stanley estimating China's AI industry (and related sectors) could reach $1.4 trillion by 2030 with a potential 52% ROIC from AI investments, Alibaba's committed investment of at least 380 billion yuan ($52 billion) in cloud computing and AI infrastructure over the next three years is poised to yield substantial long-term returns.
The Undervaluation Thesis: Cloud as a Hidden Gem
Perhaps the most compelling argument for Alibaba's undervaluation lies in its cloud business. Alibaba Cloud stands as China’s largest cloud service provider, holding over one-third of the market. According to Statista, the public cloud market in China is projected to reach $96.68 billion this year.
Applying a conservative 10x Price-to-Sales (P/S) multiple to just Alibaba's one-third share of this market would imply a standalone valuation of approximately $322 billion for its cloud business. This figure is strikingly higher than the current total market capitalization of the entire Alibaba Group, which encompasses a vast e-commerce empire (TTG, AIDC), advertising, logistics (Cainiao), venture projects, and more. This stark disparity suggests a significant "valuation gap" with its Western peers and a deep undervaluation that market participants might eventually recognize as China's AI market continues to mature.
Acknowledging Skepticism and Navigating Risks
Despite the bullish outlook on Alibaba's AI and cloud segments, it's crucial to acknowledge the prevailing Wall Street skepticism. Many professional investors remain hesitant about Alibaba's growth renaissance, likely focusing more on the core e-commerce assets' performance and factoring in broader economic headwinds in China. The stock's more than 16% decline since the author's most recent bullish call underscores this cautious sentiment.
The author candidly admits that the standalone cloud valuation of "$322 billion" might seem "naive" and that conventional valuation metrics do not fully align with this optimistic view. This highlights the inherent "Chinese risk" and the challenge of convincing a skeptical market of the long-term AI potential amidst short-term economic and regulatory uncertainties.
Conclusion: A "Buy" Rating Reaffirmed
Even with the acknowledged risks and Wall Street's cautious stance, the argument for Alibaba remains strong. The company's strategic, large-scale investments in AI products and promising startups like MiniMax and Zhipu AI are fundamentally repositioning it at the forefront of China's burgeoning AI growth trajectory.
Alibaba's dominant position in the Chinese cloud market, coupled with the accelerating triple-digit growth in its AI-related cloud revenue, suggests that its cloud business alone holds a value that could potentially exceed the entire consolidated group's current market capitalization. For investors willing to navigate the "Chinese risk" and embrace a longer-term perspective, Alibaba, the "AI tiger," is seen as deeply undervalued, deserving of a "Buy" rating based on its robust AI ecosystem and significant unappreciated assets.
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