Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Alibaba Group Holding’s BABA March-quarter cloud revenue grew 18% year on year. Taobao and Tmall Group customer management revenue growth accelerated to 12%. The cloud business’ adjusted EBITA margin fell to 8.0% from 9.9% last quarter due to higher investments.
Why it matters: The results met Refinitiv consensus. A 0.6% software fee was introduced on Taobao in September 2024. Initially, Alibaba provided rebates and supportive measures to merchants, but these will be phased out in 2025. This should support monetization from software fees beyond September 2025.
We estimate that the rising adoption of Quanzhantui, launched in April 2024, should help Alibaba enhance monetization until fiscal 2026 (ending March), similarly to the two years of monetization growth that PDD Holdings experienced after introducing Quanzhantui in 2022.We expect adjusted EBITA margin for Alibaba’s cloud business to stay at high single digits in the coming year. We think lower utilizations should offset the positive impact of a higher mix of higher-margin artificial intelligence revenue.
The bottom line: We maintain our USD $150 fair value estimate for wide-moat Alibaba. The shares now appear fairly valued.
Long view: Given the company’s aggressive AI and cloud capital expenditures to meet excess demand, its leading public cloud market share, and its strong AI revenue growth potential, we remain optimistic about Alibaba’s cloud business outlook.
Key stats: In 2023, Alibaba held the fourth-largest global market share in public cloud infrastructure as a service, at 7.9%, just behind Google’s 8.2%, according to Gartner.
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