Veteran Analyst Delivers Stark Warning on Alibaba Stock
Bernstein retained its Buy rating on Alibaba while reducing its price target to $165 from $180, citing investor concerns over the company’s $10.2 billion equity raise, infrastructure costs and the potential returns from AI spending.
Bernstein lowered its price target for Alibaba Group Holding (NYSE:BABA) to $165 from $180 while maintaining a Buy rating. Analyst Robin Zhu said the company’s $10.2 billion equity raise has prompted investor questions because Alibaba held more than $30 billion in net cash when it accessed the market. The transaction has also led investors to reassess the expected returns from Alibaba’s substantial investment program. The lower target may pressure sentiment, although growth in AI-related cloud services could provide support. Zhu’s revised estimates include higher server costs and rental rates, partially offset by expectations for stronger revenue from Alibaba’s non-AI cloud operations. Bernstein values Alibaba’s e-commerce and cloud businesses separately and compares that assessment with a forward earnings multiple, reflecting the different growth and investment profiles of the businesses. Bernstein nevertheless sees potential for Alibaba’s AI infrastructure spending to generate attractive returns. The Zhenwu 810E chip is estimated to reach payback in about three years, while the newer M890 could reach payback in roughly 2.5 years. Those estimates suggest that newer infrastructure investments could recover their costs more quickly if adoption and demand develop as expected. For investors, the key question is whether Alibaba’s infrastructure spending can generate returns sufficient to justify both its ongoing capital requirements and the equity raise. Higher server costs and rental rates represent risks to margins and investment economics, while stronger non-AI cloud revenue and AI-related growth are potential catalysts. GuruFocus has detected three warning signs for BABA. Investors can also test their valuation thesis with GuruFocus’s free DCF calculator. This article first appeared on GuruFocus.