Alibaba: Cloud, Commerce, and the Power of Scale

Alibaba is one of the world's largest technology companies and the leading e-commerce platform in China. Through its ecosystem of online marketplaces, cloud computing, logistics, digital services, and artificial intelligence, the company connects hundreds of millions of consumers and businesses while generating substantial cash flow from its core commerce platforms. As Alibaba invests heavily in AI and cloud computing to drive its next phase of growth, it aims to build on its dominant market position and create new long-term growth engines. The question remains: Does this Chinese technology giant deserve a spot in your portfolio?

This is not financial advice. I am not a financial advisor, and I publish these analyses to document my own research and share my thoughts with readers and followers. If you are considering investing in any of the companies or ideas discussed, you should always do your own research and, if necessary, consult a qualified financial professional. All investing involves risk, and you may lose some or all of the money you invest.

For full disclosure, I do own shares in Alibaba at the time of writing this analysis. I publicly share my investment portfolio, including all of my current holdings and changes I make over time. If you are interested in seeing what I currently invest in and learning how you can follow or copy my portfolio, you can read more here.

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The Business

Alibaba was founded in 1999 by Jack Ma and 17 co-founders as an online marketplace connecting Chinese manufacturers with international buyers. Over the past two decades, the company has evolved into one of the world's largest technology companies and the backbone of China's digital economy. Rather than operating a single e-commerce platform, Alibaba has built an integrated digital ecosystem that combines online marketplaces, cloud computing, artificial intelligence, logistics, local services, digital payments, digital entertainment, and enterprise software. This ecosystem allows consumers, merchants, brands, manufacturers, developers, and enterprises to interact on a single technology platform while benefiting from services that extend far beyond online shopping. Today, Alibaba operates through four primary business groups: Alibaba China E-commerce Group, Alibaba International Digital Commerce Group, AI + Cloud Businesses, and a collection of other businesses that include logistics, mapping, healthcare, grocery retail, and digital media. The company has increasingly focused its strategy around two long-term priorities: AI + Cloud and consumption, with artificial intelligence expected to strengthen every part of its ecosystem. Alibaba's largest business is its China e-commerce platform, which includes Taobao, Tmall, Taobao Instant Commerce, 1688.com, and several specialized retail platforms. Taobao serves as China's largest online marketplace where consumers can discover millions of products from merchants and small businesses, while Tmall focuses on branded products from both Chinese and international companies seeking to reach Chinese consumers. Together these platforms form the world's largest retail commerce business by gross merchandise value. Unlike traditional retailers, Alibaba generally does not own inventory. Instead, it provides the digital infrastructure that enables merchants to reach customers while generating revenue through advertising, merchant services, commissions, software solutions, and marketing tools. The company's AI-powered recommendation engines, search capabilities, livestreaming, digital advertising platform, and merchant analytics help sellers improve customer acquisition and conversion rates while providing consumers with highly personalized shopping experiences. Alibaba has also integrated rapid delivery through Taobao Instant Commerce, allowing customers to order groceries, meals, pharmaceuticals, electronics, flowers, and other products with delivery measured in minutes rather than days. This transforms Alibaba from a traditional online marketplace into a comprehensive consumption platform that increasingly covers everyday spending. Beyond China, Alibaba has built one of the world's largest international e-commerce operations. Through AliExpress, Alibaba.com, Lazada, and Trendyol, the company serves consumers and businesses across more than 200 countries. Alibaba.com remains one of the largest global business-to-business marketplaces, connecting manufacturers and suppliers with wholesalers, retailers, and small businesses around the world. AliExpress enables consumers to purchase directly from manufacturers, while Lazada has established a leading position across Southeast Asia and Trendyol dominates the Turkish e-commerce market. These international businesses provide Alibaba with significant long-term growth opportunities while reducing its dependence on the Chinese economy. At the same time, Alibaba continues to expand localized logistics networks, merchant services, fulfillment capabilities, and AI-powered tools that help merchants manage marketing, procurement, inventory, and cross-border trade more efficiently. Alibaba's second major growth engine is its AI + Cloud business. Alibaba Cloud is China's largest cloud infrastructure provider and one of the largest cloud providers globally, offering infrastructure, platform, and AI services to enterprises, developers, governments, and financial institutions. What differentiates Alibaba from many competitors is its full-stack approach to artificial intelligence. The company develops proprietary AI chips through T-Head, operates its own cloud infrastructure, provides model-as-a-service capabilities through Alibaba Cloud, develops large language models under the Qwen family, and offers enterprise AI applications through Wukong and consumer AI through the Qwen app. This allows customers to build, train, deploy, and operate AI applications entirely within Alibaba's ecosystem. Many of China's largest enterprises rely on Alibaba Cloud to run mission-critical workloads, and the rapid adoption of generative AI is driving increasing demand for cloud infrastructure, AI computing power, and enterprise AI solutions. The technologies powering Alibaba Cloud were originally developed to support the enormous scale of Alibaba's own commerce ecosystem, creating valuable operational expertise that competitors have difficulty matching. Supporting these core businesses is a broader ecosystem that further strengthens Alibaba's competitive position. Cainiao operates one of the world's largest smart logistics networks, enabling efficient domestic and international fulfillment while supporting both Alibaba's own platforms and third-party customers. Amap provides navigation and location services that integrate with commerce and local services. Freshippo combines physical grocery stores with digital shopping and rapid delivery, while Alibaba Health provides AI-enabled healthcare and pharmaceutical services. Together, these businesses create multiple consumer touchpoints throughout daily life while generating valuable data that improves personalization, recommendation algorithms, and operational efficiency across the entire ecosystem. As AI becomes increasingly integrated across shopping, logistics, cloud computing, navigation, and enterprise software, Alibaba aims to create a unified digital platform where consumers and businesses can access multiple services through a single ecosystem. Alibaba's competitive moat is primarily built on powerful network effects, ecosystem integration, cloud leadership, logistics infrastructure, and technological scale. The company's marketplaces benefit from classic two-sided network effects. Hundreds of millions of consumers attract millions of merchants, while the vast selection of merchants and products attracts even more consumers. This self-reinforcing cycle makes Alibaba's marketplaces increasingly valuable as they grow and creates significant barriers for new competitors attempting to replicate the ecosystem. The enormous volume of transactions also generates vast amounts of consumer and merchant data, allowing Alibaba to continuously improve search, recommendations, advertising, pricing, and personalization through artificial intelligence. These data advantages help merchants achieve better sales outcomes while improving the shopping experience for consumers, reinforcing the attractiveness of the platform. Another important competitive advantage is Alibaba's integrated ecosystem. Rather than simply providing an online marketplace, Alibaba combines commerce, digital marketing, payments, logistics, cloud computing, AI, mapping, local services, and enterprise software into a unified platform. Merchants can manage customer acquisition, advertising, fulfillment, analytics, inventory, logistics, AI tools, and cloud infrastructure through interconnected services within Alibaba's ecosystem. Consumers similarly benefit from a seamless experience that spans product discovery, shopping, payments, navigation, entertainment, and rapid delivery. Because each additional service increases the value of the others, Alibaba benefits from ecosystem synergies that are difficult for competitors focused on only one part of the value chain to replicate. As the company increasingly integrates AI across every platform, these synergies are expected to become even stronger. Alibaba Cloud represents another significant source of competitive advantage. As China's leading cloud provider, the company benefits from substantial economies of scale, extensive enterprise relationships, and years of experience operating one of the world's largest technology infrastructures. Enterprise customers increasingly build applications, databases, AI models, and workflows directly on Alibaba's cloud platform. Once these systems become deeply integrated into day-to-day operations, switching to another cloud provider becomes costly, time-consuming, and operationally disruptive. These switching costs become even stronger as customers adopt Alibaba's proprietary AI models, model-as-a-service offerings, enterprise AI agents, and industry-specific solutions. The combination of cloud infrastructure, AI capabilities, and enterprise software creates long-term customer relationships with recurring revenue characteristics. Alibaba also benefits from significant advantages in logistics and operational scale. Through Cainiao, the company has developed an intelligent logistics network capable of coordinating fulfillment across China and internationally while supporting both Alibaba's own businesses and third-party customers. Fast, reliable, and increasingly automated logistics improve the consumer experience while lowering delivery costs and enabling rapid commerce services that competitors often struggle to match. Combined with Alibaba's extensive merchant relationships, global fulfillment infrastructure, and growing international presence, this logistics capability reinforces the attractiveness of the entire ecosystem. Finally, Alibaba's technological capabilities create an increasingly important competitive moat. The company operates at enormous scale across e-commerce, cloud computing, artificial intelligence, logistics, and enterprise software, generating operational knowledge and data that continuously improve its products and services. Its vertically integrated AI strategy, spanning proprietary chips, cloud infrastructure, foundation models, enterprise AI applications, and consumer AI assistants, provides significant control over performance, costs, and innovation. Because Alibaba can deploy these technologies across its own businesses before commercializing them for external customers, it benefits from real-world testing at exceptional scale. Combined with its network effects, ecosystem integration, cloud leadership, and logistics infrastructure, these technological advantages position Alibaba to remain one of the dominant digital platforms in China while expanding its international presence and AI capabilities over the coming decade.

Management

Eddie Yongming Wu serves as the CEO of Alibaba Group, a position he assumed in September 2023. As one of Alibaba’s original co-founders, he has played a central role in building the company from a small startup into one of the world’s largest technology companies. With a background in computer science from Zhejiang University of Technology, Eddie Wu has spent more than two decades developing Alibaba’s technology platforms, products, and long-term strategy. His appointment reflects Alibaba’s increasing emphasis on artificial intelligence, cloud computing, and user experience as the company enters its next phase of growth. Throughout his career at Alibaba, Eddie Wu has held a number of key leadership positions across the company’s most important businesses. He played an instrumental role in the early development and monetization of Taobao, Alibaba’s flagship consumer marketplace, helping transform it into China’s leading e-commerce platform. He also served as the founding Chief Technology Officer of Alipay, where he helped build the digital payments infrastructure that later became one of the foundations of Ant Group’s ecosystem. These experiences gave him deep expertise in product development, platform economics, and large-scale technology systems that continue to underpin Alibaba’s business today. Before becoming CEO, Eddie Wu served as Chairman of Taobao and Tmall Group, overseeing Alibaba’s domestic e-commerce operations, while also leading Alibaba Health and holding several senior technology and product management roles across the organization. Having worked across e-commerce, payments, healthcare, and digital platforms, he has gained a comprehensive understanding of Alibaba’s ecosystem and its competitive advantages. Few executives possess such broad operational experience across so many of the company’s core businesses, making him uniquely familiar with both Alibaba’s history and its future opportunities. Since becoming CEO, Eddie Wu has established two clear strategic priorities for Alibaba: "user first" and "AI-driven." He believes artificial intelligence represents the next major technological shift and has positioned AI at the center of Alibaba’s long-term strategy. Under his leadership, the company is investing heavily in AI infrastructure, cloud computing, proprietary foundation models, and AI applications while integrating artificial intelligence throughout its e-commerce ecosystem. As Eddie Wu has stated, "over the next decade, the most significant catalyst for change will be the disruptions caused by AI in all sectors," adding that companies unable to keep pace with the AI era risk becoming obsolete. This strategic focus reflects both his engineering background and his belief that AI will reshape every part of Alibaba’s business. Beyond technology, Eddie Wu has emphasized simplifying Alibaba’s organizational structure and improving execution. Shortly after becoming CEO, he reorganized the company around its core strategic priorities, bringing together Taobao, Tmall, local services, and travel businesses into a unified China E-commerce Group while sharpening the company’s focus on AI + Cloud. His objective is to create a more integrated ecosystem that delivers a better experience for consumers while enabling merchants and enterprise customers to benefit from Alibaba’s growing AI capabilities. Given his deep institutional knowledge, technical expertise, and experience building many of Alibaba’s most important businesses, Eddie Wu appears well positioned to lead the company through its next stage of development. His combination of founder-level perspective, product focus, and long-term commitment to artificial intelligence aligns closely with Alibaba’s ambition to strengthen its leadership in e-commerce, cloud computing, and AI over the coming decade.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Alibaba has historically generated lower ROIC than many of the world's leading technology companies, only exceeding 10% twice during the past decade. While this may initially appear disappointing, it is largely a reflection of the company's strategy and business mix rather than a sign of a weak competitive position. The primary reason is that Alibaba has invested aggressively in building an entire digital ecosystem rather than focusing solely on its highly profitable core e-commerce business. Over the past decade, the company has committed substantial capital to businesses such as Alibaba Cloud, Cainiao logistics, international e-commerce, local services, artificial intelligence, and digital infrastructure. Many of these businesses require significant upfront investment in data centers, logistics networks, technology platforms, and research and development before they generate attractive returns. While these investments increase the amount of capital employed, their earnings contribution typically takes several years to materialize, which naturally depresses ROIC during the investment phase. Another important factor has been the challenging operating environment in China. Following the pandemic, consumer spending slowed considerably, reducing growth across Alibaba's core e-commerce platforms. At the same time, heightened regulatory scrutiny forced the company to adjust its business practices, reduce certain merchant fees, and invest more heavily in compliance. Increased competition from companies such as PDD and ByteDance has also required Alibaba to prioritize user growth and merchant support over maximizing short-term profitability. Together, these factors have pressured operating margins and contributed to lower returns on invested capital. The decline in fiscal year 2026 deserves particular attention. ROIC fell from 8,6% to just 3,4%, primarily because Alibaba dramatically accelerated its investments in artificial intelligence and cloud infrastructure. Management has described these investments as building two factories for the future: one for AI model training and another for AI inference. Constructing these AI data centers requires substantial capital today, while the associated revenue will only be realized over the coming years. As a result, invested capital increased much faster than operating earnings, temporarily reducing ROIC. This type of decline is not uncommon for companies making large long-term infrastructure investments. Importantly, management believes these investments already show encouraging signs of generating returns. Cloud revenue growth has accelerated, AI-related services are growing rapidly, margins within the cloud business are improving, and recurring revenue from AI model and application services continues to expand. Management has also noted that demand for AI computing capacity currently exceeds available supply, stating that none of its AI computing resources are sitting idle. This suggests that the company is investing to meet existing demand rather than building excess capacity in anticipation of uncertain future growth. Looking ahead, I expect ROIC to improve over time, although it is unlikely to reach the exceptionally high levels generated by companies with more focused and asset-light business models. The heavy investments in AI infrastructure should gradually become more productive as utilization increases and higher-margin AI services generate additional revenue. At the same time, Alibaba has become more disciplined in its capital allocation, concentrating resources on its two strategic priorities of AI + Cloud and consumption while improving efficiency across several businesses. If management successfully monetizes its AI investments over the next three to five years, as it expects, today's lower ROIC may ultimately prove to be a temporary consequence of investing heavily in what could become Alibaba's next major growth engine.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Alibaba's equity grew rapidly between fiscal years 2017 and 2022 as the company generated strong profits from its dominant e-commerce business while expanding into new areas such as cloud computing, logistics, and international commerce. During this period, most of the company's earnings were retained and reinvested into the business, allowing book value to increase significantly. At the same time, many of Alibaba's strategic investments appreciated in value as China's technology sector experienced a period of rapid growth, further supporting shareholder equity. However, equity declined during fiscal years 2023 through 2025. Several factors contributed to this development. First, Alibaba's profitability came under pressure as China's economy slowed, consumer spending weakened, and competition within e-commerce intensified. Lower earnings meant less capital was added to the balance sheet through retained profits. Second, the value of several strategic investments declined as Chinese technology valuations fell following increased regulatory scrutiny and weaker investor sentiment. These unrealized losses reduced shareholders' equity even though they did not necessarily reflect deterioration in Alibaba's core operating businesses. Finally, Alibaba returned substantial amounts of capital to shareholders through its ongoing share repurchase program. While buybacks increase each remaining shareholder's ownership of the company, they also reduce the amount of equity reported on the balance sheet because cash is used to repurchase shares. The return to equity growth in fiscal year 2026 is an encouraging development. Profitability improved as Alibaba's core e-commerce business became more efficient and its cloud business accelerated growth, particularly from increasing demand for artificial intelligence services. At the same time, some of the valuation headwinds affecting the company's investment portfolio became less severe, allowing retained earnings to once again outweigh the factors reducing equity. Although Alibaba continued repurchasing shares, stronger operating performance was sufficient to produce positive growth in book value. Looking ahead, I expect Alibaba's equity to continue growing over the long term, although probably at a more moderate pace than during its early years. The company's core businesses continue to generate significant cash flow, and management expects its investments in AI and cloud infrastructure to produce increasing returns over the coming years. At the same time, Alibaba is likely to continue returning substantial capital to shareholders through share repurchases, which will partly offset the growth in retained earnings. As a result, equity may continue to fluctuate from year to year, but if management successfully monetizes its AI investments while maintaining capital discipline, the long-term direction should remain positive.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Alibaba has historically generated strong free cash flow thanks to the highly cash-generative nature of its core e-commerce business. Platforms such as Taobao and Tmall require relatively limited ongoing capital to operate compared to the amount of cash they generate, allowing Alibaba to produce substantial operating cash flow for many years. This strong cash generation has enabled the company to invest in new businesses while maintaining a very strong balance sheet. The sharp decline in free cash flow during fiscal years 2025 and 2026 was primarily driven by a deliberate increase in capital expenditures rather than a deterioration in the underlying business. Alibaba significantly accelerated investments in artificial intelligence and cloud infrastructure, building new data centers and expanding computing capacity to support the rapidly growing demand for AI services. These investments require substantial amounts of cash upfront, while the associated revenue will only be realized over time. As a result, free cash flow declined sharply in fiscal year 2025 and turned negative in fiscal year 2026 as capital expenditures exceeded the cash generated after operating expenses. Management has compared these investments to building factories before production begins. The company is effectively constructing the infrastructure needed to train AI models and deliver AI inference at scale. While these investments temporarily reduce free cash flow, management believes they represent a unique long-term opportunity. Demand for AI computing capacity continues to exceed available supply, and management has stated that none of its AI computing resources are currently sitting idle. This suggests the investments are being made to meet existing customer demand rather than speculative future demand. The decline in free cash flow margin reflects the same dynamic. Capital expenditures have increased far more rapidly than revenue as Alibaba prioritizes expanding its AI infrastructure. At the same time, the company has continued investing in quick commerce, international e-commerce, and other strategic initiatives. Although these investments weigh on cash generation today, management expects several of these businesses to become increasingly profitable over the next few years, reducing their drag on overall cash flow. Importantly, the negative free cash flow does not appear to reflect financial stress. Alibaba continues to generate substantial operating cash flow from its core businesses and maintains one of the strongest balance sheets in the global technology sector, with approximately USD 38 billion of net cash at the end of fiscal year 2026. This financial strength gives the company considerable flexibility to continue investing aggressively while also maintaining its commitment to shareholder returns. Looking ahead, I expect free cash flow to recover as the current investment cycle matures. Management expects cloud revenue growth to continue accelerating as demand for AI infrastructure, cloud services, and enterprise AI applications increases. As utilization of the newly built infrastructure rises, these assets should generate higher revenue while requiring proportionally lower incremental investment. Management also expects losses from quick commerce to narrow substantially and anticipates that its international e-commerce business will become profitable over the next few years. If these expectations materialize, Alibaba's free cash flow should improve meaningfully, although capital expenditures are likely to remain elevated as the company continues expanding its AI capabilities. Alibaba primarily uses its free cash flow in two ways. First, it reinvests heavily in long-term growth opportunities, particularly artificial intelligence, cloud computing, logistics infrastructure, and its broader digital ecosystem. These investments are intended to strengthen the company's competitive position and create new sources of future earnings. Second, Alibaba returns capital to shareholders through dividends and share repurchases. The company has become one of the largest buyers of its own shares in recent years while also introducing a regular dividend. Management has stated that it intends to continue balancing shareholder returns with disciplined investment, believing that today's AI investments will generate attractive returns and create greater long-term value for shareholders.

Debt

Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. We do this by dividing the total long-term debt by current earnings. Having done the calculations for Alibaba, it shows that the company could pay off its debt in 2,31 years, which is below the three-year threshold. In addition, Alibaba holds a substantial cash balance, giving the company significant financial flexibility and making its debt even less of a concern. The company also continues to generate strong cash from its core businesses, providing additional resources to invest in future growth while returning capital to shareholders. For these reasons, debt is not a concern for me as an investor in Alibaba.

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Risks

Competition is a risk for Alibaba because the company operates in several highly competitive markets, including e-commerce, cloud computing, artificial intelligence, logistics, and digital services. Many of its competitors are among the largest technology companies in China and around the world, with strong brands, significant financial resources, and the ability to invest heavily in new products and technologies. As consumer preferences and technology evolve rapidly, Alibaba must continuously innovate to maintain its leadership across its different businesses. The most important competitive risk comes from Alibaba's domestic e-commerce business, which remains the company's largest source of revenue and profits. While Taobao and Tmall continue to hold leading positions in China's online retail market, competition has intensified significantly in recent years. PDD Holdings has attracted price-sensitive consumers through its low-cost shopping model, while JD.com continues to differentiate itself through reliable logistics, fast delivery, and a reputation for authentic products. At the same time, ByteDance's Douyin has fundamentally changed online shopping by combining short-form videos, livestreaming, and e-commerce into a highly engaging platform. Instead of consumers actively searching for products, Douyin encourages impulse purchases through personalized content, making it an increasingly important competitor for Alibaba. Competition could affect Alibaba in several ways. If competitors continue attracting consumers through lower prices, more engaging shopping experiences, or faster delivery, Alibaba may need to increase spending on promotions, merchant incentives, and marketing to defend its market share. While these investments can help maintain customer engagement, they may also reduce profit margins and cash generation. Competition for merchants is equally important. If merchants believe competing platforms provide better sales opportunities or lower costs, they may shift more of their business away from Alibaba, reducing the attractiveness of Alibaba's marketplaces for consumers. Cloud computing and artificial intelligence represent another important competitive risk. Alibaba Cloud is the market leader in China, but it competes with Huawei Cloud, Tencent Cloud, and an increasing number of AI-focused technology companies. Internationally, Alibaba also competes with companies such as Amazon Web Services, Microsoft Azure, and Google Cloud. As businesses increasingly adopt artificial intelligence, success will depend not only on cloud infrastructure but also on the quality of AI models, computing capacity, security, and the ability to help customers integrate AI into their operations. If competitors develop superior AI capabilities or invest more aggressively in infrastructure, Alibaba's cloud growth could slow, limiting one of its most important long-term growth opportunities. International expansion also presents competitive challenges. Alibaba continues to invest in platforms such as AliExpress, Lazada, and Trendyol, but these businesses compete against well-established regional and global players, including Shopee, Amazon, and Mercado Libre in various markets. Unlike its dominant position in China, Alibaba often enters international markets where competitors already have strong customer relationships, established logistics networks, and local brand recognition. This means Alibaba may need to continue investing heavily before these businesses generate attractive returns. Another important aspect of competition is the race for talent and innovation. Alibaba competes with many of the world's largest technology companies to attract engineers, AI researchers, and software developers. As artificial intelligence becomes increasingly important, access to highly skilled employees will play a major role in determining which companies develop the most advanced technologies and products. If Alibaba struggles to attract or retain top talent, its ability to innovate could weaken over time.

Macroeconomics and geopolitics are risks for Alibaba because the company’s performance is closely tied to consumer spending in China and to the relationship between China and the rest of the world. Alibaba’s largest business remains Chinese e-commerce, meaning that weaker consumer confidence, slower wage growth, high youth unemployment, or continued weakness in the property market can directly affect spending on Taobao and Tmall. When consumers become more cautious, transaction growth can slow, merchants may spend less on advertising, and Alibaba’s core commerce business may generate lower revenue and profits. This risk is especially important because China has faced several economic headwinds in recent years. After a long period of rapid growth, the economy has slowed, and household confidence has remained fragile. Many consumers have chosen to save more rather than spend, which can hurt discretionary categories on Alibaba’s platforms. If China’s economy remains weak, Alibaba may need to rely more heavily on promotions, lower-priced products, and merchant support to keep users engaged. This could protect market share, but it may also reduce margins. Macroeconomic risk also affects Alibaba’s merchants and business customers. Many sellers on Taobao, Tmall, 1688.com, AliExpress, and Alibaba.com depend on healthy consumer demand and stable global trade. If businesses become more cautious, they may reduce marketing spending, delay digital investments, or lower inventory levels. This can reduce Alibaba’s advertising revenue, merchant service revenue, and transaction activity. A weaker economy can also affect Alibaba Cloud because enterprises may delay new technology projects or reduce spending on digital transformation. Geopolitics is another major risk because Alibaba operates at the center of several sensitive areas, including e-commerce, cloud computing, artificial intelligence, logistics, data, and chips. Tensions between China and the United States could lead to tariffs, export restrictions, investment limits, sanctions, or other regulatory actions that affect Alibaba’s business. This is particularly relevant for Alibaba’s AI and cloud strategy, because advanced chips and data center infrastructure are essential for building competitive AI services. Restrictions on access to chips, computing equipment, or foreign technology could make Alibaba’s AI investments more expensive, slower, or less efficient. Trade tensions can also affect Alibaba’s international and cross-border businesses. Platforms such as AliExpress and Alibaba.com depend on global trade flows, logistics networks, and merchants selling across borders. Higher tariffs, stricter customs rules, or restrictions on Chinese imports could make products more expensive for consumers and reduce demand. In response, Alibaba may need to invest more in local warehouses, local supply chains, and local fulfillment networks, which could increase costs before the benefits are visible. There is also a financial market risk. Alibaba is listed in both the United States and Hong Kong, and geopolitical tensions have previously created concerns about the future of U.S.-listed Chinese companies. Any renewed threat of delisting, restrictions on U.S. investment in Chinese technology companies, or forced selling by certain investors could negatively affect Alibaba’s share price, even if the underlying business continues to perform well. Conflicts outside China can also affect Alibaba indirectly. Wars or instability in regions such as Europe, the Middle East, or Russia can increase energy prices, disrupt logistics routes, raise shipping costs, and reduce consumer confidence in international markets. These effects can hurt Alibaba’s international commerce and logistics operations, particularly as the company expands outside China. Overall, macroeconomics and geopolitics are important risks because many of the factors that influence Alibaba’s growth are outside management’s control. Alibaba can improve its platform, invest in AI, strengthen logistics, and become more efficient, but it cannot control Chinese consumer confidence, global trade policy, chip restrictions, or relations between China and the United States.

Regulatory risk is one of the most significant risks for Alibaba because the company operates in one of the world's most heavily regulated technology markets. Alibaba's businesses span e-commerce, cloud computing, digital payments, logistics, digital media, artificial intelligence, and online advertising. Each of these industries is subject to extensive regulation in China, and the regulatory framework continues to evolve rapidly. As Alibaba has grown into one of China's largest technology companies, it has attracted particularly close scrutiny from regulators, meaning changes in laws or government priorities can have a larger impact on Alibaba than on many smaller competitors. The clearest example of this risk occurred in 2021, when Alibaba received a record antitrust fine of RMB 18,2 billion after regulators concluded that the company had abused its dominant market position by requiring merchants to sell exclusively on its platforms. At the same time, the company was required to change several long-standing business practices and submit regular compliance reports to regulators. Although Alibaba has adapted to these changes, the episode demonstrated that regulatory action can quickly affect profitability, competitive advantages, and investor sentiment. Regulation has continued to expand well beyond antitrust. Chinese authorities have introduced stricter rules covering data privacy, cybersecurity, artificial intelligence, algorithms, online advertising, consumer protection, pricing practices, livestreaming, content moderation, and platform governance. Because Alibaba operates across so many digital services, virtually every part of its business is affected by these rules. Complying with new regulations often requires higher compliance costs, investments in technology and personnel, changes to products and services, and adjustments to business practices. These requirements may reduce profitability or slow the introduction of new products and features. Alibaba is also responsible not only for its own activities but, to a large extent, for the actions of the millions of merchants, advertisers, content creators, and developers that operate across its ecosystem. The company must continuously monitor products, advertisements, livestreams, reviews, videos, and other user-generated content to ensure they comply with Chinese laws. Given the enormous scale of Alibaba's platforms, it is impossible to review everything perfectly. If regulators determine that prohibited products or inappropriate content have not been removed quickly enough, Alibaba could face fines, operational restrictions, or damage to its reputation. Another important regulatory risk relates to Ant Group, in which Alibaba remains a major shareholder. The suspension of Ant Group's planned IPO in 2020 and its subsequent restructuring demonstrated how quickly government policy can reshape an important part of Alibaba's ecosystem. Since then, Ant Group has become subject to much stricter financial regulation, reducing some of the growth opportunities that investors had previously expected. Any additional tightening of financial regulation could further reduce the value of Alibaba's investment in Ant Group or limit the benefits the two companies generate together. Alibaba also faces uncertainty because China's legal and regulatory framework can change relatively quickly and is sometimes interpreted differently over time. New regulations are frequently introduced for digital platforms, and authorities have broad discretion in how they enforce them. This means that business practices that are acceptable today could become restricted in the future, forcing Alibaba to modify its operations, pricing policies, investment strategy, or acquisition plans. Finally, Alibaba's corporate structure adds another layer of regulatory risk. Like many Chinese technology companies listed overseas, Alibaba uses a Variable Interest Entity (VIE) structure that allows foreign investors to gain economic exposure to businesses operating in sectors where direct foreign ownership is restricted under Chinese law. Although this structure has been used for many years and remains widely accepted, it ultimately depends on the Chinese regulatory framework. If future regulations were to change the treatment of VIE structures or impose additional restrictions on overseas-listed Chinese companies, Alibaba could face significant legal and operational challenges.

Reasons to invest

AI and Cloud is a reason to invest in Alibaba because these businesses have the potential to become the company's largest long-term growth engine. Alibaba has identified AI as the biggest technological shift since the internet and is investing heavily to position itself at the center of that transformation. While the company is still best known for its e-commerce platforms, management increasingly views AI and cloud computing as the businesses that will drive Alibaba's next phase of growth. The company is already seeing strong commercial traction, with AI-related revenue growing at a triple-digit rate for eleven consecutive quarters and cloud revenue accelerating significantly as demand for AI services continues to rise. One of Alibaba's biggest competitive advantages is that it has built a complete AI ecosystem rather than focusing on just one part of the value chain. The company develops its own foundation models through the Qwen family of large language models, operates China's leading public cloud platform, builds its own AI applications, and is increasingly deploying its own T-Head AI chips inside its data centers. Few companies globally have this level of vertical integration. Because Alibaba controls the entire technology stack, it can optimize costs, improve performance, and introduce new AI services more quickly than competitors that rely on third-party infrastructure. Alibaba also benefits from already serving millions of businesses through its cloud platform. As companies adopt artificial intelligence, many choose to build their AI applications on Alibaba Cloud because their data, software, and computing infrastructure are already integrated into the ecosystem. This creates a natural advantage, as existing cloud customers become potential AI customers as well. At the same time, Alibaba's own e-commerce, logistics, finance, and enterprise software businesses provide enormous amounts of real-world data and practical use cases that help improve its AI models and accelerate product development. Another reason for optimism is that AI adoption is expanding well beyond internet companies. Management has highlighted that manufacturers, financial institutions, retailers, healthcare providers, and many other traditional industries are increasingly deploying AI to improve productivity and automate complex tasks. As AI moves from simple chatbots to intelligent agents capable of performing increasingly sophisticated work, demand for computing power continues to grow rapidly. This benefits Alibaba because every AI application ultimately requires cloud infrastructure, model services, and computing capacity. Management expects this trend to continue for many years as businesses across virtually every industry integrate AI into their daily operations. An important development is that Alibaba's AI business is becoming increasingly profitable. Historically, cloud providers mainly generated revenue by renting computing power and storage. Today, Alibaba is generating a growing share of its revenue from higher-value AI services, where customers pay for access to advanced AI models and applications. These services typically carry higher margins than traditional cloud infrastructure. Management expects AI-related revenue to account for more than half of Alibaba Cloud's external revenue within the next year, marking a significant shift toward a higher-quality and more profitable business mix. Alibaba is also investing aggressively to expand its computing capacity. These investments have weighed on free cash flow in the short term, but management believes they are necessary because demand for AI infrastructure is growing much faster than supply. The company has stated that virtually all of its available AI computing capacity is currently being utilized and that customer demand continues to exceed what it can deliver. This supply shortage provides Alibaba with favorable pricing dynamics while giving it confidence that these investments should generate attractive returns over time.

Taobao and Tmall is a reason to invest in Alibaba because these platforms remain the foundation of the company’s business and the main source of its cash generation. Together, Taobao and Tmall form one of the largest e-commerce ecosystems in the world, serving a massive consumer base across China and connecting consumers with millions of merchants, brands, and retailers. China remains the world’s largest online retail market, and Alibaba continues to hold a leading position within that market. This gives the company a scale advantage that is difficult to replicate, as more consumers attract more merchants, and more merchants create a broader product selection that attracts even more consumers. One of the most important strengths of Taobao and Tmall is the breadth of the offering. Taobao serves a broad and diverse consumer base, offering everything from value-for-money products to niche items from smaller merchants. Tmall focuses more on branded goods and premium shopping experiences, making it an important platform for both Chinese and international brands that want to reach Chinese consumers. This combination allows Alibaba to serve different types of customers across many income levels, product categories, and shopping needs. It also makes the platform highly relevant in both strong and weak consumer environments, as consumers can find both affordable products and higher-quality branded goods within the same ecosystem. Taobao and Tmall also provide significant value to merchants. For many brands and retailers, Alibaba is not just a place to sell products but a platform to build awareness, acquire customers, advertise, analyze consumer behavior, and improve conversion rates. The large user base gives merchants access to enormous traffic, while Alibaba’s marketing tools help them target the right consumers more effectively. This creates a strong reason for merchants to continue spending money on the platform, even in a more competitive market. Alibaba’s customer management revenue, advertising tools, and merchant services are therefore important parts of the business model because they allow the company to monetize its platform without owning most of the inventory itself. Another important reason to invest is that Taobao and Tmall continue to generate substantial and stable cash flow. Management has stated that Taobao and Tmall are the major contributors to Alibaba’s operating cash flow, and that this cash flow remains stable. This matters because it gives Alibaba the financial strength to invest heavily in future growth areas such as AI, cloud computing, logistics, and international expansion while still returning capital to shareholders through dividends and share repurchases. In other words, Taobao and Tmall act as the cash engine of the group, funding Alibaba’s next stage of growth. Alibaba is also working to improve the user experience on Taobao and Tmall. The company has increased its focus on price competitiveness, customer service, product quality, membership programs, and more personalized shopping experiences. These investments may reduce profits in the short term, but they are intended to strengthen user engagement and merchant loyalty over time. In a market where competitors such as PDD, JD.com, and Douyin are fighting aggressively for consumers, maintaining a strong user experience is essential. If Alibaba can keep consumers engaged while helping merchants grow, Taobao and Tmall should remain highly valuable platforms. Looking ahead, Taobao and Tmall should continue to play a central role in Alibaba’s investment case. They may not grow as quickly as they did in the past, especially given slower consumer spending in China and stronger competition, but they remain highly profitable, deeply embedded in Chinese online consumption, and difficult to replace. Their large user base, merchant relationships, data advantages, and cash generation provide Alibaba with a strong foundation. As long as Taobao and Tmall remain healthy, Alibaba has the resources to invest in AI and cloud while continuing to reward shareholders.

Quick commerce is a reason to invest in Alibaba because it gives the company exposure to one of the fastest-growing segments of Chinese retail while making its ecosystem more relevant in consumers' everyday lives. Unlike traditional e-commerce, where deliveries typically take one or more days, quick commerce focuses on delivering products such as groceries, meals, medicine, personal care items, and other everyday essentials within 30 minutes to an hour. Consumer expectations are increasingly shifting toward faster delivery, and management believes this represents a structural change in shopping behavior rather than a temporary trend. By investing aggressively in quick commerce today, Alibaba aims to position itself as a leader in this rapidly expanding market. What makes Alibaba particularly well positioned is that it does not have to build this business from scratch. The company already has hundreds of millions of active consumers, millions of merchants, and an extensive logistics network. By integrating quick commerce directly into the Taobao ecosystem, Alibaba allows consumers to purchase everything from groceries to electronics within a single platform while offering multiple delivery options depending on how quickly the customer wants the product. This creates a more comprehensive shopping experience and strengthens Alibaba's position as a one-stop destination for daily consumption. Another attractive aspect of quick commerce is that it significantly increases customer engagement. Traditional online shopping is often limited to occasional purchases, whereas groceries, meals, and other daily necessities are bought much more frequently. This gives consumers a reason to open the Taobao app several times a week rather than only when making larger purchases. Higher engagement strengthens customer relationships, creates additional opportunities for merchants, and gives Alibaba more ways to monetize its ecosystem through advertising, merchant services, and other platform offerings. Importantly, Alibaba is already seeing encouraging operational progress. Revenue from quick commerce has grown rapidly, while management has simultaneously improved the profitability of each order through better delivery efficiency and a more attractive mix of products. Although the business is still operating at a loss as Alibaba prioritizes growth, management expects those losses to narrow substantially over the next two years and believes the business can ultimately become profitable without sacrificing its market position. This suggests that the current investments are laying the foundation for a business that can generate attractive returns over time. Quick commerce also creates valuable synergies across Alibaba's broader ecosystem. It drives additional traffic to the platform, increases transaction frequency, supports the company's logistics infrastructure, and helps grow categories such as groceries, healthcare, and consumer staples. As consumers become accustomed to using Alibaba for both planned purchases and immediate everyday needs, the company strengthens its relationship with users and makes its ecosystem increasingly difficult to replace.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 6,38, which is from fiscal 2026. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 19% a year in the next five years but 15% is the highest I use. Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on Alibaba's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $191,40. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Alibaba at a price of $95,70 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. Normally, I estimate maintenance capital expenditures because only those expenditures are necessary to maintain the current business. However, I have chosen not to calculate a Ten Cap price for Alibaba. The company is currently making exceptionally large investments in AI infrastructure and cloud computing, which management has repeatedly described as growth investments rather than maintenance spending. Because Alibaba does not disclose how much of its capital expenditures are maintenance versus growth, any estimate would become highly subjective and could significantly distort the valuation. For that reason, I do not believe the Ten Cap calculation provides a meaningful estimate of Alibaba's intrinsic value at this stage.

The final calculation is called the Payback Time price. It estimates what an investor should be willing to pay based on the company’s free cash flow per share and an assumed growth rate, with the goal of recouping the investment within eight years. Normally, I calculate this valuation using the company’s current free cash flow. However, I have chosen not to calculate a Payback Time price for Alibaba. The company is currently making exceptionally large investments in AI infrastructure, cloud computing, proprietary chips, and data centers that are intended to drive future growth rather than maintain the existing business. These investments temporarily depress free cash flow, meaning that the current figure does not reflect the underlying earning power of the business. Because the Payback Time model relies on normalized free cash flow, I do not believe it provides a meaningful estimate of Alibaba’s intrinsic value at this stage.

Conclusion

I believe that Alibaba is an intriguing company with strong management. The company has built its moat through its powerful network effects, ecosystem integration, cloud leadership, logistics infrastructure, and technological scale. Alibaba has historically generated relatively low ROIC because it has invested heavily in businesses such as cloud computing, logistics, international expansion, and AI rather than focusing solely on maximizing profits from its core e-commerce business. The 2026 ROIC likely understates the company's long-term potential because it reflects exceptionally high investments in AI infrastructure that are expected to generate higher earnings and improve returns over time. Alibaba has historically generated strong free cash flow thanks to the highly cash-generative nature of its core e-commerce business. Free cash flow declined significantly in fiscal year 2025 and turned negative in fiscal year 2026 because the company dramatically increased investments in AI infrastructure, cloud computing, and other long-term growth initiatives. As these investments begin generating higher revenue and several newer businesses become more profitable, I expect free cash flow to recover and grow over time. Alibaba faces intense competition across e-commerce, cloud computing, artificial intelligence, and international markets, requiring the company to continuously invest in innovation, pricing, and user experience to defend its market position. While these investments may pressure profitability in the short term, maintaining its competitive position is essential for sustaining long-term growth. Alibaba's performance is closely tied to the Chinese economy and the global geopolitical environment, making weaker consumer spending, slower economic growth, trade tensions, and technology restrictions important risks. While management can continue improving its products and investing in future growth, factors such as consumer confidence, global trade policies, and relations between China and the United States remain largely outside the company's control and could affect growth and profitability. Alibaba also operates in a highly regulated industry, and changes in Chinese laws or government priorities can require the company to modify its business practices, increase compliance costs, or limit future growth opportunities. Because Alibaba operates across so many digital services, regulatory changes can affect nearly every part of its business. AI and Cloud are reasons to invest in Alibaba because they have the potential to become the company's largest long-term growth engine as demand for AI infrastructure and services continues to grow rapidly. Alibaba's leading cloud platform, full-stack AI capabilities, and large existing customer base position the company well to benefit as businesses increasingly adopt artificial intelligence. Taobao and Tmall are reasons to invest in Alibaba because they remain the company's dominant e-commerce platforms and generate substantial, stable cash flow. This strong cash generation provides Alibaba with the financial resources to invest in future growth opportunities such as AI and cloud computing while continuing to return capital to shareholders. Quick commerce is another reason to invest in Alibaba because it gives the company exposure to one of the fastest-growing areas of Chinese retail while increasing customer engagement through more frequent, everyday purchases. As the business scales and becomes more efficient, management expects losses to narrow significantly, creating another potential long-term growth driver. I believe there are many things to like about Alibaba, and buying shares at the Margin of Safety price of $95 could be a good long-term investment.

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