Alibaba FQ3 25 – Mo Comes To China

AI momentum finally makes it to China.

• Alibaba reported good results where a jump in cloud revenues allowed the company to justify large investments in AI, which has allowed the AI momentum story to finally come to China after ignoring it for 2 years.
• FQ3 25 revenues / EPS were RMB280.1bn / RMB2.55 ahead of estimates of RMB275.1bn / RMB2.43.
• The main driver of the surprise was the Cloud Intelligence Group (AliCloud) which is China’s equivalent of AWS where growth has accelerated to 13% YoY.
• This is still a very far cry from overseas where the cloud companies are growing 25%+ YoY (despite being bigger than AliCloud) indicating that there is still a lot of catching up that AliCloud can do if this continues.
• Within this AI-related product revenues are growing by over 100% YoY and its increasing relevance is starting to affect the headline numbers.
• The core e-commerce business continues to chug along despite the weak macro environment aided by its digital marketing tool (Quanzhantui) that helps merchants connect their products to potential buyers.
• Merchants found that this tool was particularly helpful during the Singles Day promotion event and its success also helps Alibaba earn a little bit more from every sale that it makes.
• Despite the steady developments, the real story of these results is the momentum that Alibaba has picked up from its partnership with Apple and the sudden interest in Chinese AI triggered by DeepSeek.
• This combined with the fact that the Chinese state has realised that it needs the private sector (see here and here) to have a chance of fulfilling its ambitions, and suddenly Chinese Technology is back in vogue.
• CEO, Eddie Wu was quick to grab the opportunity stating that Alibaba would invest more in AI infrastructure over the next 3 years than it has in the previous decade and that the pursuit of AGI is Alibaba’s strategy.
• This is exactly what the market wanted to hear, and the shares are currently up nearly 13% in Hong Kong in Friday’s trading.
• The net result is that the steady performance of its e-commerce business and the cash that it has on the balance sheet gives Alibaba the resources to invest in AI.
• Its partnership with Apple and the competitive performance of its Qwen AI models against global peers and benchmarks are evidence that its efforts to develop an AI capability are paying off.
• Most important of all is that Jack Ma is off the naughty step and has been allowed back into the ranks of the entrepreneur class in China which will also no longer be victimised by the state.
• Instead, it looks like the state will level the playing field and allow the private sector to flourish which should bring back VC investment and the start-up ecosystem in time.
• Against this backdrop, there is still plenty of space for the Chinese technology sector to rally as it remains far cheaper than all of its global peers.
• For example, if Alibaba’s multiple expands to match where Amazon is currently trading (35x 2025 PER) then the shares could return to previous highs.
• If there is also a recovery in earnings growth as domestic consumption picks up as a result of the state letting the private sector develop once again, then it could go higher.
• The risks of investing in China remain much higher than elsewhere, but for the moment momentum and narrative are back in the driving seat meaning that there is every sign that the rally will continue.
• My long-held, deeply frustrating position in Alibaba has finally stopped being a drag on my portfolio and I am sitting tight as I think that there is quite a bit further to go.