BABA-W (9988.HK)

Key Updates

BABA-W rallied 3.29% to $128.60 since the last report, extending the recovery from the seven-session selloff that bottomed at $120.40. This represents the second consecutive positive session, bringing the total rebound to 6.81% from the recent low. The stock remains under pressure year-to-date (-9.82%) and over six months (-18.09%), but momentum indicators suggest a potential near-term stabilization above the $125 psychological support level. The recovery coincides with no new fundamental catalysts, indicating technical buying following the oversold conditions established during the prior week's selloff.

Current Trend

BABA-W trades in a defined downtrend on a year-to-date basis, declining 9.82% despite the recent two-session recovery. The 6-month performance of -18.09% confirms sustained selling pressure, though the stock has established preliminary support at the $120.40 level tested on May 28. The current price of $128.60 positions shares 6.4% above this critical support and approximately 3% above the $125 psychological level that has alternated between support and resistance over the past week. The 1-month performance of +2.06% and 5-day gain of +0.78% indicate consolidation within a broader downtrend, with the stock attempting to establish a base in the $120-$130 range. Resistance likely exists at the $135-$140 zone based on the 6-month decline trajectory.

Investment Thesis

The investment thesis centers on Alibaba's strategic pivot toward AI infrastructure and cloud computing as primary growth drivers, with management targeting AI-related products to represent 50% of cloud unit external revenue within approximately one year. The company's deployment of 560,000 Zhenwu chips and the launch of the Zhenwu M890 (delivering 3x performance improvement) positions Alibaba to capture margin expansion through in-house chip deployment while reducing reliance on external semiconductor suppliers. Morgan Stanley projects cloud revenue growth of 42% in fiscal Q1 and 45% for fiscal year 2027, validating the strategic investments despite near-term profitability compression. The thesis assumes that current losses in AI model training and consumer app investments will narrow as scale economics materialize over a 3-5 year horizon, while the core e-commerce business stabilizes amid competitive pressures from Meituan and JD.com in food delivery.

Thesis Status

The investment thesis remains intact but under near-term pressure. The fiscal Q4 results showed adjusted net profit collapsing to 86 million yuan from 29.85 billion yuan year-over-year, confirming that AI investments are materially compressing profitability as anticipated. However, management's assertion of "extremely clear" ROI expectations over 3-5 years and full utilization of service capacity validates the strategic direction. Morgan Stanley's maintained bullish stance with raised price targets and Nomura's similar upgrade provide institutional validation. The 7% year-to-date decline in Hong Kong-listed shares aligns with broader Hang Seng Tech Index weakness, suggesting market-wide rather than company-specific concerns. The revenue miss in fiscal Q4 (243.38 billion yuan vs. 246.475 billion yuan expected) introduces execution risk, but the 3% year-over-year growth demonstrates resilience. The thesis progression depends on cloud growth acceleration materializing in fiscal Q1 2027 and narrowing losses in the "all others" segment as projected.

Key Drivers

Alibaba's near-term performance hinges on three critical factors. First, the Zhenwu M890 chip launch and Qwen3.7-Max model upgrade represent tangible progress in AI infrastructure, with the 3x performance improvement positioning the company competitively against external chip providers. Second, cloud business momentum remains the primary catalyst, with Morgan Stanley projecting 42% growth in fiscal Q1 and management confirming full capacity utilization. Third, profitability compression from AI investments and food delivery competition creates near-term headwinds, with adjusted net profit declining 99.7% year-over-year in fiscal Q4. The balance between investment-driven losses and cloud revenue acceleration will determine whether the stock can sustain the recovery from $120.40 or resume the 6-month downtrend.

Technical Analysis

BABA-W has established a preliminary support base at $120.40 after testing this level on May 28, followed by a two-session recovery of 6.81% to $128.60. The stock now trades above the $125 psychological level that served as resistance during the May 27-29 period, suggesting a potential shift in near-term momentum. Volume patterns during the recovery sessions indicate buying interest, though the 6-month decline of 18.09% establishes overhead resistance in the $135-$140 zone. The 1-month gain of 2.06% reflects consolidation within a $120-$130 range, with the current price positioned in the upper half of this band. Key resistance exists at $130 (round number), $135 (approximate 6-month retracement level), and $140 (prior support turned resistance). Support levels include $125 (psychological), $122 (mid-range), and $120.40 (recent low). The year-to-date decline of 9.82% suggests the primary trend remains negative, requiring a sustained break above $135 to signal trend reversal.

Bull Case

• Cloud revenue acceleration: Morgan Stanley projects 42% growth in fiscal Q1 2027 and 45% for the full fiscal year, with management confirming full capacity utilization and AI-related products targeting 50% of external cloud revenue within one year. Source
• In-house chip deployment economics: The Zhenwu M890 delivers 3x performance improvement over the predecessor, with 560,000 units already deployed, positioning in-house chips as a cost-effective solution to improve Alibaba Cloud margins and reduce reliance on external semiconductor suppliers. Source
• Institutional analyst support: Both Morgan Stanley and Nomura raised price targets following the fiscal Q4 results, with analysts confirming that the cloud unit met all key assessment metrics despite near-term profitability pressure. Source
• Clear ROI timeline on AI investments: Management expressed confidence that the return on AI investments over 3-5 years remains "extremely clear," with losses in the "all others" category expected to narrow in the coming quarter as scale economics materialize. Source
• Technical support established: The stock has formed a preliminary base at $120.40 with a 6.81% recovery over two sessions, suggesting oversold conditions have been addressed and establishing a defined risk level for long positions. Source

Bear Case

• Profitability collapse: Adjusted net profit plunged 99.7% year-over-year to just 86 million yuan in fiscal Q4 from 29.85 billion yuan, with AI investments and competitive pressures creating material earnings compression that may persist longer than management's 3-5 year timeline. Source
• Revenue growth deceleration and misses: Fiscal Q4 revenue of 243.38 billion yuan grew only 3% year-over-year and missed analyst expectations of 246.475 billion yuan, indicating execution challenges and potential market share losses in core e-commerce operations. Source
• Intensifying food delivery competition: Competition from Meituan and JD.com in China's food-delivery sector continues to pressure profitability metrics, forcing Alibaba to increase investments in consumer apps that contribute to the widening losses in the "all others" segment. Source
• Sustained downtrend momentum: The stock has declined 18.09% over six months and 9.82% year-to-date, underperforming in line with the Hang Seng Tech Index and establishing a pattern of lower highs that suggests continued selling pressure despite the recent two-session bounce. Source
• Uncertain AI monetization timeline: While management targets AI-related products to represent 50% of cloud external revenue within approximately one year, the actual path to profitability remains unclear as the company reported mark-to-market gains rather than core operational improvements driving the doubled reported net profit. Source