From ‘At All Costs’ to ‘Efficient Growth,’ Q3 Marks the Profit Turning Point

The strategic focus of Alibaba is undergoing a fundamental shift, evolving from the previous ‘growth at all costs’ to ‘efficient growth.’

According to Chase Wind Trading Desk, a research report released by JPMorgan on November 26 stated that Alibaba’s strategic evolution is entering its second phase, with its growth model transitioning from being driven by user scale in the past to a more profitability-focused efficiency-driven model. The inflection point for profitability may have already appeared.

The bank’s analyst team ‘expects Alibaba’s consolidated profitability to reach an inflection point in Q3 of fiscal year 2025 (the quarter ending September 2025) and begin to recover significantly in Q4 2025 as the company shifts from a user scale-driven growth model to a more profitability-focused efficiency-driven model.’

The core drivers of this transformation come from positive developments in two major businesses. The report notes that, driven by artificial intelligence demand, the cloud business has optimistic growth prospects, while losses in the food delivery and instant purchase businesses are narrowing significantly. JPMorgan predicts that Alibaba’s ‘food delivery business losses are expected to narrow by approximately 40% quarter-on-quarter to about RMB 21 billion in Q4 2025.’ At the same time, the bank expects ‘cloud business revenue year-on-year growth to increase further to 37%.’

Based on the potential for accelerated growth and improved profitability across multiple businesses, JPMorgan believes that before the arrival of the profit recovery cycle, Alibaba’s stock offers an attractive risk-reward profile. The bank maintains an ‘Overweight’ rating for Alibaba but has lowered its target price for the US-listed shares and Hong Kong-listed shares from $240 and HK$235 to $230 and HK$225, respectively.

Significant narrowing of losses in instant purchase business, synergies emerging

Local life services, particularly the instant purchase business, which was once a field of substantial investment by Alibaba, is now showing a clear path toward improved profitability.

The report cites information from Alibaba’s management stating that ‘compared to July/August, the unit economic loss of the instant purchase business so far this quarter has decreased by half.’ This is mainly due to improvements in product mix (non-beverage orders exceeding 75%), higher average order value (increasing by double-digit percentage points compared to July/August), and reduced delivery costs.

In terms of market share, the business remains stable. The report notes that ‘the GMV market share of the food delivery business remains at approximately 40%.’ More importantly, its losses are narrowing rapidly. JPMorgan expects that ‘losses in the food delivery and instant purchase business will narrow further, from RMB 35 billion in the quarter ending September to RMB 21 billion in the quarter ending December.’

The report emphasizes that the improvement in this business is not isolated, as increased customer retention rates and order frequency are ‘creating strong cross-platform synergies with traditional e-commerce businesses and emerging instant purchase businesses, driving increases in traffic, GMV, and high-margin advertising revenue.’

Strong AI demand expected to further accelerate cloud business growth.

The cloud business has become another robust growth engine. Report data shows that in the quarter ending September, Alibaba’s ‘cloud business revenue growth accelerated to 34% year-over-year.’

The strength of demand has exceeded supply capacity. The report notes, ‘Management reiterated that demand is growing faster than the increase in AI server capabilities, and as a result, Alibaba’s investment scale may surpass its three-year capital expenditure plan of RMB 380 billion.’ This signal highlights an AI-driven structural supply-demand imbalance and suggests that Alibaba will continue to increase investments to seize market opportunities.

Based on this, JPMorgan predicts that Alibaba’s ‘cloud business revenue growth will further increase to 37% in the quarter ending December and remain at a solid 30% level throughout calendar year 2026.’

CMR business faces short-term challenges, but Alibaba’s long-term outlook remains positive.

Despite optimism about the cloud and flash sale businesses, JPMorgan also pointed out potential short-term challenges for the core e-commerce business. The report forecasts that growth in Customer Management Revenue (CMR) will slow due to high base effects.

The report explained, ‘As monetization efforts (site-wide promotions and technical service fees) enter a phase of high comparative base, we expect the core CMR year-over-year growth to slow to 6%/6% in the quarter ending December and calendar year 2026.’ The report believes that synergies from flash sale orders will not be sufficient to fully offset the impact of the high base.

In light of this, JPMorgan adjusted its financial forecasts for Alibaba. The report stated, ‘We have lowered our revenue forecasts for fiscal years 2026/2027 by 1%/2% to reflect the high base effect of site-wide promotions and technical service fees, but this is partially offset by the strong growth in the cloud business.’

However, after analyzing all business segments, JPMorgan ultimately reaffirmed its positive stance on Alibaba. The report maintained an ‘Overweight’ rating for Alibaba stock, with the new target price based on ‘a 16x forward P/E ratio for fiscal year 2028.’

The report summarized its investment thesis, stating, ‘With multiple businesses poised to achieve accelerated growth and/or improved profitability, the company’s current valuation implies a 16x forward P/E ratio for 2027. We believe that ahead of several quarters of earnings recovery, Alibaba’s stock presents a favorable risk/reward profile.’

Editor/Lambor