Alibaba's Target Price Cut 17% by Morgan Stanley Amid Spending Surge

Morgan Stanley has reduced its target price for Alibaba's American Depositary Receipts from 180 USD to 150 USD. The decision comes as the company faces increased pressure on its short-term profits due to significant investments in its food delivery and instant shopping services. The investment bank estimates that Alibaba spent approximately 100 million USD on these services during the first fiscal quarter ending in June.

Analysts at Morgan Stanley predict that Alibaba's expenditures on food delivery and instant shopping could double to 200 million USD in the second fiscal quarter. This increased spending is expected to result in a year-over-year decline of over 40% in the EBITA (Earnings Before Interest, Taxes, and Amortization) for both Taobao and local consumer services. Despite this, Morgan Stanley suggests that this level of investment may represent a peak, as the company has announced a 500 million USD subsidy plan and competitors like JD.com are starting to see a slowdown in their growth.

Alibaba's intensified focus on food delivery began on April 30, when its platform Taobao upgraded its "Hourly Delivery" service to "Taobao Instant Shopping," with Ele.me handling the delivery. This move quickly boosted daily orders to over 40 million. On July 2, Taobao Instant Shopping launched a 500 million USD subsidy program, which led to a significant increase in orders for both food and non-food categories. The service saw its daily order volume surpass 80 million on July 5, with daily active users reaching 200 million.

In response to Alibaba's aggressive push into the food delivery market, Meituan also increased its promotional efforts, offering large discounts and even "0 USD purchases" on some items. This surge in user activity caused Meituan's platform to experience temporary outages. According to Meituan's data, by July 5, its instant retail orders exceeded 120 million, with over 100 million of those being food orders.

Despite the short-term financial strain, Morgan Stanley remains optimistic about Alibaba's potential in AI-driven capabilities. The investment bank maintains its preference for e-commerce platforms, ranking Alibaba above Meituan and JD.com. For the next quarter, Morgan Stanley expects Alibaba's cloud computing business revenue to grow by 22% year-over-year, with capital expenditures continuing to rise. The company's profit margin is anticipated to stabilize at 8%, with total revenue growing by 2% year-over-year and adjusted EBITA declining by 16% year-over-year.