On November 25, Alibaba released its latest earnings report, delivering better-than-expected results in cloud revenue growth and AI capital expenditures, initially driving its stock up 4% in pre-market trading.
However, the market optimism did not last. After the earnings call, the stock reversed course and closed down over 2%.
According to trading desk sources, Goldman Sachs analyzed in its latest report that Alibaba's "high-open, low-close" performance was mainly attributed to heightened investor concerns over its e-commerce business. The report stated:
We believe the negative stock reaction stems from: (1) the AI and cloud segment's outperformance reinforcing this year’s AI-driven narrative and valuation re-rating; yet (2) increased worries about e-commerce after management commented on the earnings call that customer management revenue (CMR) growth may slow due to intensifying competition and user investments, while China e-commerce EBITA could see quarterly volatility.
During the earnings call, Alibaba CFO Toby Xu noted, "Short-term volatility in customer management revenue and profits can be expected."
Regarding CMR, base effects from payment service fees and site-wide promotions will have an impact. Since payment fees were introduced last September, growth is expected to decelerate starting next quarter due to this base effect. However, as we’ve consistently emphasized, our top priority is securing long-term market share. In this process, we will continue decisive investments in consumers and merchants while advancing business model upgrades. Hence, short-term fluctuations in CMR and profits should be anticipated.
Goldman Sachs views this commentary as the key trigger for the stock’s negative reaction. The bank noted that market concerns stem from "fiercer e-commerce competition and user reinvestment," as well as high year-ago comparables from software service fees.
**AI Narrative Strengthens: $53B Capex Target "May Be Too Small," Cloud Outlook Upbeat** In contrast to e-commerce worries, Alibaba’s AI and cloud business emerged as the standout highlight of the earnings report.
During the period, Alibaba Cloud revenue grew 34% YoY, surpassing Goldman’s 31% estimate. AI-related revenue now accounts for 20% of external customer revenue, marking the ninth consecutive quarter of triple-digit growth.
Goldman Sachs highlighted Alibaba’s aggressive capital expenditure (CapEx) stance as further evidence of its AI commitment.
The report showed Alibaba’s quarterly CapEx surged 80% YoY to RMB 32 billion, while rival Tencent’s CapEx declined. Goldman attributed Alibaba’s "more aggressive CapEx plan" to its "AI infrastructure capabilities and full-stack AI products," likening it to Google’s proprietary TPU advantage.
Management even suggested that the previously announced three-year $53 billion investment target "may be too small," hinting at potential additional spending.
Given strong AI demand, Goldman remains optimistic about Alibaba Cloud’s growth, forecasting December and March quarter growth of 38% and 37%, respectively.
**Goldman Maintains Buy Rating, Sees AI Leadership and Narrowing Losses in On-Demand Retail** Incorporating these factors, Goldman adjusted its Alibaba valuation. Due to a lower e-commerce valuation, it trimmed its 12-month SOTP-based price target from $205/HK$199 to $197/HK$192.
Despite the cut, Goldman kept its "Buy" rating, citing unchanged cloud valuation and an "intact AI-driven story."
Its base-case scenario assumes "Alibaba’s AI and cloud business will maintain its leadership in China, while core e-commerce profits stabilize and on-demand retail losses narrow in coming quarters."
Analysts added that the market may be underestimating the potential of its international cloud business and the resulting "globalization premium."