BABA-W (9988.HK)

Key Updates

BABA-W declined 2.71% to $114.80 since June 8, extending YTD losses to -19.50% and marking a -25.07% decline over six months. The selloff accelerates despite no new fundamental developments, with the stock down -14.26% over the past month. The continued weakness reflects persistent investor concerns over AI investment costs pressuring margins, as highlighted in the May 13 earnings report where adjusted net profit collapsed to 86 million yuan from 29.85 billion yuan year-over-year. While AI infrastructure announcements (Zhenwu M890 chip, Qwen3.7-Max model) demonstrate technological progress, the market remains focused on near-term profitability headwinds rather than long-term strategic positioning.

Current Trend

BABA-W remains in a pronounced downtrend, declining -19.50% YTD and -25.07% over six months, with accelerating losses of -14.26% in the past month alone. The stock has broken below the $120.40 support level established in early June and now trades at $114.80, representing new multi-month lows. The five-day decline of -9.32% indicates intensifying selling pressure, with no technical support levels evident in the provided data. The persistent downward trajectory across all timeframes—from one-day (-1.96%) to six-month (-25.07%)—signals strong bearish momentum without signs of stabilization. The stock has underperformed the Hang Seng Tech Index, which gained 0.3% during the May 14 session when BABA rose 5.05%, suggesting company-specific concerns beyond broader market dynamics.

Investment Thesis

The investment thesis centers on Alibaba's transformation into an AI-driven cloud infrastructure leader, with management targeting AI-related products to represent 50% of cloud external revenue within one year. The company has delivered 560,000 Zhenwu AI chips to date, positioning in-house deployment as a margin-improvement strategy for Alibaba Cloud. Morgan Stanley projects cloud revenue growth of 42% in fiscal Q1 and 45% for fiscal year 2027, indicating robust demand for AI services. However, the thesis faces near-term execution risk as AI investments have driven adjusted net profit to collapse from 29.85 billion yuan to just 86 million yuan year-over-year in Q4 fiscal 2025. Management maintains that ROI clarity exists over a three-to-five-year horizon, with CEO Eddie Wu noting full capacity utilization. The thesis requires investors to tolerate significant near-term profitability pressure in exchange for potential leadership in China's AI infrastructure market, where competitive intensity from Meituan and JD.com in adjacent businesses like food delivery adds additional margin pressure.

Thesis Status

The investment thesis remains intact strategically but faces mounting near-term headwinds that have driven the stock down -25.07% over six months. The May 20 unveiling of the Zhenwu M890 chip (3x performance improvement) and Qwen3.7-Max model validates the technological execution component of the thesis, as does Morgan Stanley's confirmation that the cloud unit met all key assessment metrics. However, the market is penalizing the stock for profitability deterioration, with Q4 fiscal 2025 adjusted net profit collapsing 99.7% year-over-year to 86 million yuan. Revenue of 243.38 billion yuan missed analyst expectations of 246.475 billion yuan, indicating top-line challenges alongside margin pressure. The thesis assumes investors will look through near-term losses to anticipated three-to-five-year returns, but current price action suggests the market demands more immediate evidence of the AI investment payoff. Morgan Stanley and Nomura price target increases following the May 14 rally demonstrate sell-side support, yet the subsequent -14.26% decline over the past month indicates institutional investors remain unconvinced about timing of profitability recovery.

Key Drivers

Profitability collapse remains the primary driver of stock weakness, with adjusted net profit falling 99.7% year-over-year to 86 million yuan in Q4 fiscal 2025, driven by substantial AI investments and competitive pressures in food delivery. AI infrastructure development continues with the Zhenwu M890 chip delivering 3x performance improvements and over 560,000 Zhenwu units already deployed, positioning the company for margin improvement through in-house chip utilization. Cloud growth acceleration represents a positive offset, with Morgan Stanley projecting 42% revenue growth in fiscal Q1 and 45% for fiscal year 2027, driven by full capacity utilization. Management guidance indicates AI-related products will represent 50% of cloud external revenue within approximately one year, signaling rapid business mix transformation. Competitive intensity in core markets persists, with Meituan and JD.com pressuring food delivery margins and contributing to the profitability squeeze beyond AI investments alone.

Technical Analysis

BABA-W exhibits severe technical deterioration across all timeframes, trading at $114.80 after breaking below the $120.40 support level that briefly held in early June. The stock has declined -1.96% in one day, -9.32% over five days, -14.26% over one month, and -25.07% over six months, demonstrating accelerating downward momentum. The -19.50% YTD decline indicates sustained selling pressure without meaningful support levels visible in recent price action. The five-day loss of -9.32% represents the sharpest short-term decline in the provided data, suggesting capitulation or forced selling. No technical reversal patterns are evident, and the consistent negative performance across 1-day, 5-day, 1-month, 6-month, and YTD periods indicates strong bearish conviction. The stock's failure to sustain the brief May 14 rally (+5.05% intraday) and subsequent -14.26% monthly decline confirms that technical buyers lack conviction. Volume data is not provided, but the magnitude of declines suggests distribution rather than consolidation.

Bull Case

• Cloud revenue projected to grow 42% in fiscal Q1 and 45% for fiscal year 2027 by Morgan Stanley, with full capacity utilization indicating strong demand for AI services and positioning cloud as the primary growth driver for the company.
• AI-related products expected to represent 50% of cloud external revenue within one year, demonstrating rapid business transformation and potential for AI to become the dominant revenue stream with higher margins than legacy businesses.
• Over 560,000 Zhenwu AI chips delivered with new M890 model offering 3x performance improvement, providing cost-effective in-house deployment that should improve Alibaba Cloud margins as the company reduces reliance on third-party chip vendors.
• Management expects "extremely clear" return on AI investment over three-to-five-year horizon, with Morgan Stanley and Nomura raising price targets following cloud unit meeting all key assessment metrics, indicating institutional validation of long-term strategy.
• Reported net profit doubled to 25.48 billion yuan despite adjusted profit collapse, demonstrating that equity investment portfolio provides balance sheet strength and potential liquidity for continued AI investments without financial distress.

Bear Case

• Adjusted net profit collapsed 99.7% year-over-year to 86 million yuan in Q4 fiscal 2025, representing catastrophic margin deterioration that reflects both AI investment costs and competitive pressures, with no clear timeline for profitability recovery.
• Revenue of 243.38 billion yuan missed analyst expectations of 246.475 billion yuan, indicating top-line challenges beyond margin pressure and suggesting demand headwinds in core e-commerce and cloud businesses despite AI investment narrative.
• Intensifying competition from Meituan and JD.com in food delivery pressures profitability, demonstrating that margin deterioration stems from multiple sources beyond strategic AI investments and may represent structural rather than cyclical challenges.
• Losses in "all others" category driven by Qwen model training and consumer app costs, with Morgan Stanley expecting only a narrowing rather than elimination of losses in the coming quarter, indicating prolonged period of cash consumption before profitability inflection.
• Three-to-five-year ROI timeline for AI investments requires investors to tolerate extended profitability pressure with execution risk, while the -25.07% six-month decline and -19.50% YTD loss demonstrate market skepticism about management's ability to deliver promised returns.