Alibaba's Cloud Business Valued Below Zero: A Shift in Market Perception

Alibaba Group Holding's cloud business, Alibaba Cloud, is valued by the market at less than zero, despite investors betting on it to transform Alibaba into a high-margin tech giant, similar to Amazon's transformation through AWS.

Alibaba Group Holding's cloud business, Alibaba Cloud, is valued by the market at less than zero, despite investors betting on it to transform Alibaba into a high-margin tech giant, similar to Amazon's transformation through AWS. The company's aggressive investment in AI and cloud infrastructure, coupled with its dominant domestic market position, presents an intriguing opportunity for long-term investors.

Alibaba Cloud, the fourth-largest global cloud provider, has seen its stock price decline significantly, trading at a 50% discount to AWS and Azure [2]. This discrepancy is driven by several factors, including geopolitical risks and the company's relatively modest global market share. However, a closer examination reveals that Alibaba Cloud's undervaluation may be a mispricing.

Alibaba Cloud's Q2 2025 results underscore its strategic pivot toward AI. Revenue grew 18% year-over-year, with AI-related products driving triple-digit growth. The company's adjusted EBITA surged 69%, reflecting operational efficiency gains and strong demand for its services. Domestically, Alibaba Cloud holds a 37% market share in China, a market it dominates through deep integration with Alibaba's e-commerce ecosystem and tailored compliance solutions. Its cost-competitive pricing and localized infrastructure give it an edge over global rivals, who struggle with regulatory fragmentation and data sovereignty concerns [2].

Despite these strengths, Alibaba Cloud trades at a steep discount to its peers. AWS and Azure command forward P/E ratios of 33.42, reflecting their first-mover advantages, global scale, and hybrid cloud ecosystems. Alibaba Cloud's lower valuation is partly attributable to geopolitical risks, including U.S. export restrictions on advanced semiconductors, which constrain its ability to develop cutting-edge AI models. Additionally, its international footprint remains modest, with a 4% global market share compared to AWS's 30% [2].

However, this discount may represent a mispricing. Alibaba Cloud's $50.2 billion net cash position provides a buffer against macroeconomic volatility, while its AI-first strategy aligns with the long-term trajectory of cloud computing. The company's focus on localized markets—where it can leverage its compliance expertise and cost advantages—positions it to outperform in regions where global hyperscalers face regulatory hurdles [2].

Recent regulatory developments in China and globally add nuance to the valuation debate. In China, the State Administration for Market Regulation (SAMR) has introduced draft standards for generative AI, easing some restrictions on foreign-origin models. While this temporarily reduces regulatory friction, long-term risks persist, particularly as the U.S. tightens export controls on advanced GPUs. Alibaba Cloud's reliance on domestic alternatives or partnerships to circumvent these constraints will be critical to its competitiveness. Globally, the trend toward stricter data governance and antitrust enforcement—exemplified by the EU's Digital Markets Act and U.S. investigations into tech giants—creates a fragmented landscape. Alibaba Cloud's localized approach may shield it from some of these pressures, but its international expansion could face headwinds in markets with stringent data privacy laws [2].

For long-term investors, Alibaba Cloud's strategic investments in AI and cloud infrastructure, coupled with its dominant domestic market position and cost advantages, present an undervalued opportunity. The company's focus on sustainability and strategic partnerships also align with global trends, further insulating it from policy shocks. While regulatory uncertainty remains a key risk, the potential for valuation convergence over the next 3-5 years suggests that Alibaba Cloud could be a high-conviction play for investors willing to look beyond short-term volatility.

References:
[1] https://www.ainvest.com/news/rise-ai-driven-retail-giants-assessing-alibaba-undervalued-opportunity-2508/
[2] https://www.ainvest.com/news/alibaba-cloud-strategic-undervaluation-age-ai-regulatory-shifts-2508/