Daiwa Says Alibaba's Heavy AI Spending Could Ease With Better Cloud Profits

what happened

Daiwa analyst John Choi says in a research note, as reported by Market Talk, that worries about Alibaba's high AI outlays could fade if profitability in its AI and cloud units improves. Daiwa expects stronger cloud margins to help Alibaba move toward funding AI spending from its own cash flow by fiscal 2028.

The brokerage also notes that most investors it met on an October trip to the U.S. are still underweight China and its internet sector. Daiwa thinks a re-rating of the sector will wait until investors become confident in Alibaba and Tencent, which would be the first names bought if portfolios raise China exposure. Daiwa still holds a positive view on the sector and keeps its buy rating on Alibaba.

why it matters

For funds focused on China, the note suggests that any recovery in sector valuations would likely start with the largest companies, so cloud margin trends and capital spending plans at Alibaba and Tencent are the key signals. Shifting AI projects to self-funding would reduce pressure on free cash flow, a factor that matters for valuing large Chinese internet firms.

tags

instruments