Alibaba's Undervalued Growth Story: AI Cloud & Instant Commerce in a Brightening Macro Climate

Alibaba Group (NYSE:BABA) is navigating a pivotal moment in its evolution. While short-term margin pressures from aggressive investments in logistics and AI infrastructure have led to price target cuts, Jefferies' recent analysis underscores a compelling case for long-term growth. Combined with improving U.S.-China relations and a stock trading at a discount to its peers, Alibaba presents a rare opportunity for investors to capitalize on its structural advantages in AI-driven cloud services and the booming instant commerce sector.

AI-Driven Cloud: A Strategic Moat in Tech's Next Frontier

Alibaba's Cloud Intelligent Group is at the forefront of China's AI revolution. Jefferies projects a 23% year-over-year revenue surge in its June 2025 quarter, fueled by enterprise demand for tools like Qwen VLo, its advanced generative AI model capable of text-to-image and image-to-image tasks. This growth reflects a shift toward AI as a critical business tool, a trend Alibaba has leveraged to outpace rivals like Tencent Cloud (which grew 16% in 2024).

The cloud segment's expansion is no accident. Alibaba has invested heavily in AI capabilities, with cloud-related AI products posting triple-digit growth for seven consecutive quarters. This focus positions the firm to capitalize on global demand for cloud-based AI solutions, a market expected to grow at a 21% CAGR through 2027.

Instant Commerce: Dominating the "Last-Mile Economy"

Alibaba's instant commerce platforms—Taobao, Eleme, and Fliggy—have reached a critical milestone: 80 million daily orders by July 2025, including 13 million non-meal orders. This growth, nearly double the 2024 levels, reflects the success of its 30-minute delivery model, which has resonated with younger urban consumers. The integration of these services under the Taobao Tmall Group (TTG) creates a formidable ecosystem, blending e-commerce, food delivery, and travel into a one-stop digital hub.

Yet, this rapid scaling comes at a cost. Jefferies forecasts a 20% EBITA decline for TTG due to logistics investments, including automation and infrastructure upgrades. While these expenses pressure near-term profits, they are strategic bets on long-term dominance. Competitors like Meituan and JD.com are also racing to build out last-mile networks, but Alibaba's scale and AI-driven logistics optimization give it an edge.

Jefferies' Bullish Call: "Buy the Dip"

Despite lowering its price target to $150 from $156, Jefferies reaffirmed its Buy rating, emphasizing that Alibaba's valuation prioritizes market share over short-term earnings. The firm's analysis highlights:
- User Growth: Taobao's 88VIP membership program now boasts over 50 million users, driving higher average order values.
- AI Synergies: Cloud and instant commerce are increasingly interconnected. For instance, AI-powered recommendations on Taobao boost conversion rates, while cloud infrastructure underpins the logistics systems enabling fast delivery.
- Stable Cash Flows: Entertainment platforms like Kuaishou and Bilibili provide a steady revenue stream, shielding Alibaba from macroeconomic volatility.

The broader analyst consensus remains strongly bullish, with an average 12-month price target of $159.67, implying a 45% upside from Alibaba's July 2025 price of $110.71. Even Jefferies' adjusted $150 target suggests a compelling entry point.

A Brightening Macro Backdrop

Improving U.S.-China relations add a tailwind. Diplomatic tensions have eased, with both sides signaling cooperation on trade and tech. This could reduce regulatory risks for Alibaba, which derives a small but growing portion of revenue from international markets. Bridgewater Associates' recent stake-building in Alibaba—now holding 1.4% of shares—signals institutional confidence in the company's resilience amid geopolitical shifts.

Valuation: A Discounted Leader

Alibaba's forward P/E of 11 contrasts sharply with the broader tech sector's average of 18. This undervaluation persists despite its leadership in AI and instant commerce. Analysts at TipRanks note that the stock's current price reflects near-term margin pressures but not the 13.7% bottom-line growth expected in fiscal 2026, rising to 18.5% in 2027.

Investment Considerations

• Upside Catalysts: Positive earnings surprises in Q3 2025 (despite margin headwinds), AI cloud revenue outperformance, and continued order growth in instant commerce.
• Downside Risks: Intensifying competition in logistics, slower-than-expected AI adoption by enterprises, or a resurgence in U.S.-China trade tensions.
• Entry Point: The current price offers a margin of safety, with Jefferies and peers projecting long-term upside.

Conclusion: A Long-Term Play with Near-Term Discounts

Alibaba's investments in AI and instant commerce are creating a moat that few rivals can match. While short-term earnings will feel the strain of scaling these initiatives, Jefferies and analysts see a clear path to dominance in China's tech landscape—and beyond. With improving U.S.-China dynamics and a stock priced to reflect pessimism, now is a prudent time to position for Alibaba's long-term trajectory. Investors willing to overlook near-term volatility may find this dip a rare opportunity to buy a global tech leader at a discount.

Stay patient, stay long.