JPMorgan has issued a research report stating that ahead of Alibaba (NYSE: BABA)'s September quarter earnings, it has lowered the company's adjusted earnings per share forecasts for fiscal 2027 and fiscal 2028 by 9% and 10% respectively, while raising Alibaba's fiscal 2027 adjusted EBITDA by 8% and lowering fiscal 2028 adjusted EBITDA by 4%.

The bank has cut its target price for Alibaba (HKEX: 09988) by 4.88%, from HK$205 to HK$195, maintaining an "Overweight" rating.

Fiscal Third Quarter Expected to Mark Cloud Business Profit Turning Point, Adding Positions After Earnings Release Recommended

The report indicates that in Alibaba's fiscal third quarter (October-December), Alibaba Cloud's EBIT will for the first time cover losses from artificial intelligence model and application businesses, with cloud business growth beginning to contribute profits to the group.

JPMorgan notes that large-scale infrastructure investment extends the growth cycle, but depreciation will occur before capacity utilization improves; meanwhile, new computing power is still awaiting deployment, causing delays in initial revenue recognition for the cloud business; cash invested in computing power construction reduces interest income accordingly. Depreciation is a real cost; shareholder returns depend on return on assets, financing costs, and the actual retained economic benefits of Alibaba (HKEX: 89988). Based on this logic, the bank's adjusted EBITDA forecasts for Alibaba's fiscal 2027 and fiscal 2028 are 14% and 30% above market consensus, respectively. Investors are advised to add positions on dips after the earnings release.

AI Business Losses Narrowing at the Margin, Profit Turnaround Requires Growth Prerequisites

JPMorgan forecasts that in Alibaba's fiscal second quarter (July-September), losses in the artificial intelligence laboratory and application segment will approach RMB 10 billion. While still at elevated levels, this is below the June quarter peak, and with the ongoing iteration of the Tongyi large model, segment losses are expected to roughly stabilize.

To achieve full coverage of AI business losses by cloud business EBIT in the fiscal third quarter, the prerequisite is that cloud business revenue growth remains above 50% and segment margins continue to improve. Once combined cloud plus AI profits turn positive, it will validate the bank's previous view that as multiple rounds of infrastructure investment gradually mature, long-term cloud business margins are expected to approach 20%, also meaning the cloud segment itself can absorb AI-related operating losses. Additionally, the bank expects Alibaba will not conduct a new round of equity financing within the current fiscal year. Based on buy-side institution feedback, investors need 2-3 quarters of data verification, and the fiscal second quarter will be the second round of verification.

JPMorgan believes that current market consensus neither accounts for this important profit turning point in the fiscal third quarter nor fully reflects Alibaba Cloud's high growth expectation of over 50% in fiscal 2028, which is the core reason why the bank's fiscal 2028 EBITDA forecast is significantly above market consensus.

E-commerce Profits Stabilizing, Instant Retail Losses Continuing to Narrow

On the e-commerce front, the bank expects Alibaba's fiscal second quarter EBIT to continue stabilizing, with instant retail remaining the primary drag. Calculations show that the company's core commercialization revenue grew approximately 1% year-on-year on a like-for-like basis, roughly flat versus the previous quarter; Taobao and Tmall Group EBIT was flat year-on-year, an improvement from the 3% year-on-year decline in the fiscal first quarter, reflecting marginally easing industry competitive pressure. The growth gap between commercialization revenue and EBIT has narrowed to approximately 1 percentage point, indicating segment margins have stabilized without further deterioration.

The bank estimates instant retail business losses for the quarter at approximately RMB 9.2 billion, significantly below RMB 35 billion in the same period last year; with product mix upgrades driving higher average order values, the business is expected to continue narrowing losses without sacrificing market share.

Cloud Business Margins Continuing to Rise, Turning Point Is Key Test for AI Investment Returns

Specifically for the cloud and AI segment, JPMorgan expects Alibaba Cloud revenue in the fiscal second quarter to grow 53% year-on-year, with EBIT margin rising from 11.6% in the previous quarter to 12.4%, and expects margins to continue climbing in the subsequent fiscal third and fourth quarters. The artificial intelligence laboratory and application business EBIT loss for the quarter is estimated at approximately RMB 10.6 billion, with combined cloud plus AI EBIT still showing a small loss.

The bank expects that by the fiscal third quarter, combined cloud plus AI EBIT is expected to turn positive, corresponding to Alibaba Cloud revenue growth exceeding 55% year-on-year and cloud business margins surpassing 15%. JPMorgan emphasizes that this profit turning point is the first key empirical test of the return on capital from AI investment and will become the core point of market divergence on Alibaba's stock price over the next 1-2 fiscal quarters; before the turning point is truly realized, actual business performance is still needed to prove that AI investment can translate into tangible returns.