BABA-W (9988.HK)

Key Updates

BABA-W declined 2.61% to $111.80 since June 10, extending the relentless selloff to -21.60% YTD and -25.76% over six months. The stock has now fallen 16.13% over the past month alone, with no signs of stabilization despite strategic AI advancements. While no new material developments emerged in the past two days, the absence of positive catalysts amid continued technical deterioration reinforces the bearish momentum established in previous reports. The investment thesis centered on AI-driven cloud growth remains intact strategically, but near-term execution risks and profitability pressures continue to weigh heavily on valuation.

Current Trend

BABA-W remains in a severe downtrend, declining 21.60% YTD and accelerating losses with a 16.13% drop over the past month. The stock has fallen consecutively over the past four reporting periods (June 2, 4, 8, and 10), demonstrating persistent selling pressure without meaningful support formation. The current price of $111.80 represents a new multi-period low, with the stock breaking below the $114.80 level established on June 10 and the $118.00 mark from June 8. Technical momentum remains decisively negative, with the 5-day decline of 9.47% indicating accelerating downward velocity. No support levels have held, and the absence of any positive price action suggests capitulation may not yet be complete.

Investment Thesis

The investment thesis rests on Alibaba's transformation into an AI-powered cloud infrastructure leader, leveraging proprietary chip technology and large language models to capture high-margin enterprise demand. Management projects AI-related products will constitute 50% of Alibaba Cloud's external revenue within approximately one year, positioning the division as the primary growth engine with projected cloud revenue growth of 42% in fiscal Q1 and 45% for fiscal year 2027 according to Morgan Stanley analysts. The Zhenwu M890 chip, delivering 3x performance improvement over its predecessor with over 560,000 units already deployed, provides cost advantages for in-house operations while creating competitive moats in complex agentic AI workloads. However, this thesis requires sustained investment tolerance through near-term profitability compression, as evidenced by adjusted net profit collapsing to 86 million yuan in fiscal Q4 from 29.85 billion yuan year-over-year.

Thesis Status

The strategic thesis remains fundamentally sound but faces severe market skepticism regarding execution timeline and profitability recovery. While technological milestones continue—the Zhenwu M890 launch and Qwen3.7-Max upgrade demonstrate tangible progress—the market prioritizes near-term earnings compression over long-term positioning. The 21.60% YTD decline reflects investor unwillingness to underwrite the 3-5 year return horizon management articulates, particularly as fiscal Q4 adjusted net profit collapsed 99.7% and revenue missed expectations at 243.38 billion yuan versus 246.475 billion yuan consensus. Competitive pressures from Meituan and JD.com in food delivery compound profitability concerns beyond AI investments. The thesis requires either accelerated monetization evidence or broader market sentiment improvement to regain traction. Current valuation implies significant doubt about management's ability to execute the AI transition without permanent margin impairment.

Key Drivers

No new material catalysts emerged since June 10, but the absence of positive developments amplifies existing concerns. The primary near-term driver remains profitability trajectory, with investors awaiting evidence that AI investments will narrow losses in the "all others" category as Morgan Stanley projects for the coming quarter. The Zhenwu M890 chip deployment and full service capacity utilization noted by CEO Eddie Wu provide operational foundations, but monetization timing remains uncertain. Competitive dynamics in food delivery continue pressuring margins, while mark-to-market gains on equity investments—which drove reported net profit to 25.48 billion yuan—mask underlying operational weakness. The broader Hang Seng Tech Index performance, which Alibaba has underperformed significantly, suggests sector-wide headwinds beyond company-specific issues. Upcoming fiscal Q1 results will be critical to validate or refute the 42% cloud growth projection.

Technical Analysis

BABA-W exhibits severe technical deterioration with no signs of stabilization. The stock has declined in four consecutive reporting periods, breaking through $118.00, $114.80, and now trading at $111.80 with accelerating downward momentum. The 5-day decline of 9.47% represents the steepest short-term drop in the current sequence, while the 1-month loss of 16.13% demonstrates sustained selling pressure. The 6-month decline of 25.76% and YTD loss of 21.60% place the stock in confirmed bear market territory with no established support levels. Volume and volatility patterns suggest capitulation has not yet occurred, as each successive reporting period shows continued deterioration rather than stabilization. The absence of any positive daily movements in recent sessions indicates one-sided selling pressure. Key resistance now exists at $114.80 (June 10 level), $118.00 (June 8 level), and $122.90 (June 4 level). Until the stock can establish a multi-day base and reclaim $114.80, the technical picture remains decisively bearish with risk of further downside to psychological support at $110.00 or below.

Bull Case

• Cloud revenue growth projected at 42% in fiscal Q1 and 45% for fiscal year 2027, with AI-related products expected to reach 50% of external cloud revenue within one year, positioning the division as the primary growth driver according to Morgan Stanley analysts.
• The Zhenwu M890 chip delivers 3x performance improvement over its predecessor with over 560,000 units already deployed, providing cost advantages for in-house operations and improving Alibaba Cloud margins through proprietary infrastructure.
• Management expresses confidence in "extremely clear" return on investment over 3-5 years despite near-term profitability pressures, with CEO Eddie Wu noting full utilization of service capacity according to investor communications.
• Morgan Stanley and Nomura raised price targets following cloud business assessment, with Morgan Stanley confirming the cloud unit met all key metrics, suggesting institutional confidence in long-term trajectory.
• The Qwen3.7-Max large language model designed for advanced agent coding and complex reasoning tasks positions Alibaba competitively in high-value enterprise AI applications with specialized capabilities for agentic workloads.

Bear Case

• Adjusted net profit collapsed 99.7% to 86 million yuan in fiscal Q4 from 29.85 billion yuan year-over-year, with revenue missing expectations at 243.38 billion yuan versus 246.475 billion yuan consensus, demonstrating severe profitability compression from AI investments.
• The stock has declined 21.60% YTD and 25.76% over six months with accelerating momentum (16.13% monthly decline, 9.47% over 5 days), indicating persistent selling pressure and absence of valuation support despite strategic initiatives.
• Intensifying competition from Meituan and JD.com in food delivery continues pressuring profitability beyond AI investments, with competitive pressures cited as a key margin headwind in fiscal Q4 results.
• Reported net profit improvement to 25.48 billion yuan was primarily driven by mark-to-market gains on equity investments rather than operational performance, masking underlying business weakness according to fiscal Q4 analysis.
• The 3-5 year return horizon management articulates for AI investments requires sustained investor patience through continued near-term losses, with Morgan Stanley expecting losses in the "all others" category to narrow only gradually, creating extended profitability uncertainty.