March 19, 2026 10:43 AM GMT Alibaba Group Holding | Asia Pacific BABA 3QF26: Cloud/CMR in line, EBITA misses on QC & All Others Losses Unchanged In-line Modest revision lower Impact to our thesis Financial results versus consensus Direction of next 12-month consensus EPS Source: Company data, Morgan Stanley Research Key Takeaways Exhibit 1: 3QFY26 results review | Alibaba Group | Dec-24 | Sep-25 | Dec-25 | | | | | --- | --- | --- | --- | --- | --- | --- | | YE Mar | 3Q25 | 2Q26 | 3Q26 | YoY | 3Q26 | Diff | ...

Core Insights - Alibaba Group (BABA) is significantly increasing its investment in artificial intelligence, but this aggressive spending is raising concerns about its near-term profitability as evidenced by its recent earnings report [1][7] Financial Performance - The company reported non-GAAP earnings of 61 cents per ADS for Q2 fiscal 2026, missing the Zacks Consensus Estimate by 7.58% [1] - Non-GAAP diluted earnings in domestic currency were RMB 4.36, reflecting a 71% year-over-year decline, despite a 5% increase in revenues to RMB 247.8 billion [1] - Capital expenditures surged 80% year-over-year to RMB 31.9 billion ($4.5 billion), resulting in negative free cash flow of RMB 21.8 billion, a reversal from a RMB 13.7 billion inflow a year ago [2] - Adjusted EBITDA fell 78%, with the margin dropping from 17.4% to 3.7% [2] Investment Strategy - Alibaba is committed to spending at least RMB 380 billion on AI and cloud initiatives over three years, having already invested RMB 120 billion [3] - The company is expanding its AI footprint through various projects, including the open-source RynnBrain robotics model and integrating AI across its platforms [3] Competitive Landscape - Other tech giants are also ramping up their capital expenditures, with Amazon projecting approximately $200 billion for 2026 and Alphabet guiding $175-$185 billion, both focusing on AI and cloud services [4] - Unlike Alibaba, Microsoft and Google are maintaining robust profitability, which provides them with a financial cushion for their investments [4] Stock Performance and Valuation - BABA shares have increased by 29.5% over the past six months, outperforming the Zacks Internet – Commerce industry and the Zacks Retail-Wholesale sector, which saw declines of 9.1% and 0.7%, respectively [5] - The Zacks Consensus Estimate for fiscal 2026 earnings is $5.96 per share, indicating a 33.85% year-over-year decline [10] - BABA stock is currently trading at a forward 12-month price/sales ratio of 2.42X, compared to the industry's 1.91X, and has a Value Score of F [11]

Core View - Jefferies analyst Thomas Chong has lowered the price target for Alibaba Group Holding Limited (NYSE:BABA) to $225 from $231 while maintaining a Buy rating, emphasizing the company's growth potential in artificial intelligence and cloud computing [1][3] Financial Performance - For the second quarter of fiscal 2026, Alibaba reported a 15% year-over-year increase in total revenue, driven by a 10% increase in China e-commerce Customer Management Revenue and a 34% rise in Cloud Intelligence revenue [3] - AI-related product revenues have grown at a triple-digit pace for the ninth consecutive quarter, with external customer revenue accelerating by 29%, indicating strong monetization of Alibaba's AI and cloud capabilities [3] Company Overview - Founded in 1999 and headquartered in Hangzhou, China, Alibaba operates one of the world's largest digital commerce and cloud ecosystems, connecting U.S. businesses with over 40 million global B2B buyers through Alibaba.com [4]

Core Viewpoint - Alibaba is heavily investing to drive revenue growth, particularly in its e-commerce and cloud computing segments, despite facing challenges in profitability and cash flow [1][11]. Group 1: Cloud Computing - Alibaba's cloud intelligence revenue grew by 34% to $5.6 billion, surpassing the 26% growth in fiscal Q1, with AI product revenue more than doubling [2]. - The adjusted EBITA for the cloud segment increased by 35% to $506 million, indicating strong performance driven by AI demand [2]. - The company is considering increasing its capital expenditure budget to meet growing customer demand, although supply constraints may impact its ability to enhance AI infrastructure spending [3]. Group 2: E-commerce Operations - Alibaba's e-commerce revenue rose by 16% to $18.6 billion, with quick-commerce revenue surging by 60% to $3.2 billion [5]. - The third-party business revenue increased by 10% to $11.1 billion, while direct sales rose 5% to $3.4 billion, and wholesale sales jumped 13% to $947 million [5]. - Despite the growth, investments in quick commerce led to a 76% drop in segment EBITA, with the company planning to prioritize quick commerce investments over profitability in the coming years [6]. Group 3: Financial Performance - Overall revenue for Alibaba increased by 5% to $34.8 billion, but grew by 15% when excluding dispositions [8]. - Adjusted EBITA fell 78% to $1.3 billion, and adjusted earnings per American depositary share (ADS) decreased by 71% to $0.61 [8]. - Operating cash flow dropped 68% to $1.4 billion, with free cash flow showing an outflow of $3.1 billion due to investments in quick commerce and AI infrastructure [9]. Group 4: Market Position and Valuation - Alibaba's stock has increased approximately 85% year-to-date, trading at a forward price-to-earnings (P/E) ratio of about 16 times fiscal 2026 analyst estimates [1][13]. - The company ended the first half of its fiscal year with $46.1 billion in cash and short-term investments, and $39.5 billion in debt, indicating a strong balance sheet despite current cash burn [9].

Core Insights - Alibaba reported a year-over-year revenue increase of 7% and a profit increase of 36% for the March quarter of 2025, but both figures fell short of consensus estimates [1] Segment Performance - Taobao and Tmall Group experienced a revenue growth of 9% - International Digital Commerce grew by 22% - Cloud Intelligence saw an 18% increase - Local Services reported a 10% growth - Digital Media grew by 12% - However, Cainiao Logistics experienced a decline [1]