Alibaba's AI-Driven Cloud Unit Accelerates Growth: Is Now the Time to Buy?

Alibaba Group's recent 19% stock surge in Hong Kong has reignited investor interest in its AI-driven cloud computing business, a unit that now represents the company's most compelling growth story. The Cloud Intelligence Group (CIG) reported a 26% year-over-year revenue increase in Q1 2025, reaching $4.66 billion, with AI-related product revenue growing at triple-digit rates for the eighth consecutive quarter. This acceleration, coupled with the development of a proprietary AI chip and a $53 billion, three-year investment plan, has positioned Alibaba as a key player in the global AI cloud race. But is this momentum sustainable, and does it justify a bullish investment thesis?

Strategic AI Adoption: A Catalyst for Cloud Growth

Alibaba's cloud unit has shifted from a cost-center narrative to a profit-driven engine, driven by its aggressive AI monetization strategy. AI-related products now account for 20% of the cloud unit's external revenue, with triple-digit growth sustained for eight quarters. This is a stark contrast to the unit's historical struggles with profitability, which were exacerbated by intense competition in China's cloud market. The company's focus on AI infrastructure—ranging from large language models (LLMs) to AI-powered logistics and customer service—has allowed it to capture a 33% share of China's AI cloud market, outpacing rivals like Tencent and Baidu.

A critical enabler of this growth is Alibaba's development of a custom AI inference chip, a move that reduces reliance on U.S. suppliers like Nvidia and aligns with China's push for technological self-reliance. This chip, expected to launch in late 2025, is designed to optimize the performance of Alibaba's Qwen series of models, which have been downloaded over 300 million times. By vertically integrating AI hardware and software, Alibaba aims to reduce costs and improve margins, a strategy that mirrors Microsoft's Azure-NVIDIA partnership but with a localized twist.

Valuation Metrics: A Discounted Opportunity?

Alibaba's stock currently trades at an 11.8x P/E ratio, significantly below its 5-year average of 22.3x and the broader Shanghai Composite's 18.2x. This valuation dislocation reflects lingering skepticism about the company's core e-commerce business but overlooks the cloud unit's strong fundamentals. Adjusted EBITA for the cloud division surged 26% YoY in Q1 2025, and its gross margin expansion is expected to accelerate with the adoption of in-house AI chips.

While global cloud leaders like AWS (30% market share) and Azure (20%) dominate the international AI cloud market, Alibaba's 36% share in China provides a unique advantage. The company's open-source initiatives, including the Qwen model, have fostered a developer ecosystem that rivals Meta's Llama, further solidifying its position in the AI value chain. Analysts at Bernstein recently upgraded Alibaba to “Outperform,” citing its undervalued AI and cloud segments and projecting 25–30% revenue growth for the cloud unit in fiscal 2026.

Competitive Positioning: Navigating Risks and Opportunities

Alibaba's cloud unit faces headwinds, including a 76% decline in free cash flow in Q2 2025 due to aggressive AI and infrastructure investments. The company has also slashed API pricing for its Qwen-Long model by 97% to retain market share, a strategy that could pressure margins in the short term. However, its focus on AI-native infrastructure—such as AI-powered supply chain efficiencies and green data centers—offers long-term differentiation.

Globally, Alibaba competes with AWS, Azure, and Google Cloud, which have higher valuation multiples but slower AI-specific growth. For instance, AWS's AI revenue grew 17% YoY in Q2 2025, while Alibaba's cloud unit achieved 26% growth. This suggests that Alibaba's AI-driven cloud business is more capital-efficient and better positioned to capitalize on China's AI adoption boom.

Investment Thesis: Balancing Optimism and Caution

The case for Alibaba hinges on its ability to sustain AI-driven growth while managing capital intensity. The company's $53 billion investment plan, which includes AI chips, servers, and data centers, is a bet on long-term dominance in the AI cloud market. However, regulatory risks, rising competition from Pinduoduo and JD.com, and geopolitical tensions could dampen its global ambitions.

For investors, Alibaba's current valuation offers a compelling entry point, particularly for those with a 3–5 year horizon. The cloud unit's EBITA growth and AI monetization potential justify a premium to its historical multiples. However, short-term volatility remains a concern, as evidenced by the stock's mixed performance post-earnings: a 3-day average return of -0.73% and a 10-day return of -2.68% over 15 events from 2022 to 2025, with only a modest 0.52% recovery over 30 days.

Conclusion: A High-Conviction Bet on AI

Alibaba's AI-driven cloud unit represents a transformative shift in the company's growth trajectory. While risks persist, the combination of strategic AI adoption, proprietary infrastructure, and a discounted valuation makes it a high-conviction opportunity for investors who believe in the long-term potential of AI-driven cloud computing. As the global AI market races toward $1 trillion by 2028, Alibaba's ability to execute on its AI roadmap will determine whether this is a fleeting rally or the start of a sustained renaissance.

Investment Advice: Consider a core position in Alibaba for long-term AI and cloud exposure, with a stop-loss at $120 to mitigate short-term volatility. Monitor Q3 2025 earnings for updates on AI chip development and cloud profitability.
"""