We project rapid expansion of the generative AI sector in China, fuelled by breakthroughs in large models, rising enterprise adoption, and supportive government policy.

Chinese large models and cloud providers are positioned to capture generative AI opportunities in the domestic market, as we think regulatory constraints will largely keep out foreign competitors.

China’s AI-related regulations encompass a broad range of considerations, including upholding socialist core values, requirements related to training data, data privacy and storage, content moderation, complaint and reporting mechanisms, and intellectual property rights.

We believe any firm offering generative AI services to the public in China will most likely rely on domestic providers, given their greater experience in adhering to local AI regulations. We believe Apple’s partnership with Alibaba (NYS: BABA) to support Apple Intelligence in China reinforces our view.

Growing recognition for Baba’s AI models

Alibaba’s open-source models have achieved top-tier recognition, ranking in the top two in China on Hugging Face (the world’s largest AI open-source community, backed by Google, Amazon, and Nvidia), and Artificial Analysis (an independent AI benchmarking and analysis company). Alibaba Cloud has open-sourced some models from its Tongyi Qianwen (Qwen) series, which have garnered the most global adoption.

In the long run, Alibaba’s Qwen open-source models have the potential to generate a network effect, provided they remain among the most popular frameworks for developers building applications in China and to a lesser extent globally, where geopolitical factors may limit traction.

Open-source models thrive on community contributions. As more developers participate, the models’ quality and functionality improve, attracting even more developers and users to the ecosystem. The high number of derivative models of Qwen on Hugging Face is an early indicator that Qwen could develop a network effect, though we have not factored this potential into our base case.

AI models complimented by cloud capabilities

In addition to Alibaba’s strong model development capabilities in China, its robust cloud infrastructure in China plays a key role in attracting customers to build AI initiatives on Alibaba Cloud.

Alibaba Cloud offers easier management, faster deployment, and maximum efficiency for Qwen models. Its platforms, Model Studio and the China-version Bailian, enable developers to customise Qwen models with their business data in just one click.

Developers using Alibaba’s open-source models are more likely to choose Alibaba Cloud, given the optimised integration and convenience that other cloud providers may lack. Particularly when Alibaba’s LLMs are comparable with competitors for the customers’ use cases.

Also, if customers want to use open-source models like DeepSeek that are available on various cloud providers’ platforms, we think they are more likely to use such models in Alibaba Cloud, given Alibaba Cloud’s strong capabilities.

Alibaba Cloud was the only Chinese provider, and one of the top three globally, to be recognised in Forrester’s fourth-quarter 2024 report with a “leader” ranking for both strength of offering and strategic vision, scoring higher than Google Cloud on these metrics.

AI and cloud growth can offset other headwinds

We think wide-moat Alibaba is undervalued. While we think the near-term price competition in food delivery presents some downside risks, which we will address in our next report, we believe the AI earnings growth will offset the risks from food delivery.

For the next five years, we forecast Alibaba’s AI revenue to grow at a 67% compound annual growth rate. Over the next decade, we assume a 21% CAGR in cloud revenue, driven by a 46% CAGR in AI revenue. We maintain our total revenue and adjusted EBITA CAGRs at 7% and 8%, respectively, for the next decade.

We expect cloud-related revenue to represent 38% of total revenue and cloud-related adjusted EBITA to represent 34% of total adjusted EBITA at the end of the decade, up from 12% and 6% in fiscal 2025, thanks to AI tailwinds. Cloud accounts for 21% of our valuation.

Alibaba Group ADR (BABA)

  • Moat rating: Wide Moat
  • Fair Value estimate: USD 156 per ADR
  • Star Rating: ★★★★

This was an abridged extract from Chelsey Tam and Junhao Yang’s research report, titled “Alibaba: China’s AI Cloud Giant”, that was released on August 12 2025 for Morningstar ARC and Pitchbook users.

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Terms used in this article

Star Rating:Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.