Broker: OCBC Investment Research
Date: 24 September 2024
AI-Enabled Marketing and Ad Tech Integration
Alibaba continues to integrate AI into its core operations, particularly in the areas of marketing and advertising technology. In April 2024, Alibaba soft-launched a new site-wide, AI-enabled marketing tool designed to improve efficiency and expand take rates for merchants. This tool enhances merchants’ return on investment (ROI) through improved marketing techniques, leveraging AI to optimize site-wide ad performance. Alibaba’s management expects that the full benefits of this tool will materialize within 6 to 12 months after its launch, driving long-term growth in Customer Management Revenue (CMR).
Focus on Cloud Growth and AI Adoption
Alibaba’s cloud business has been a major driver of its financial performance. In the first quarter of FY25 (ending June 2024), Alibaba Cloud posted a 6% year-on-year (YoY) revenue increase, with EBITA margin improving to 8.8%, driven by robust AI product adoption and double-digit growth in the public cloud sector. Management highlighted that AI budgets among cloud clients have seen material growth compared to the previous year, underscoring the increasing demand for AI-driven cloud solutions. Alibaba remains committed to expanding its AI infrastructure, which is reflected in the substantial increase in capital expenditures (CAPEX) during this period.
Tongyi Qianwen: The Latest Large Language Model (LLM)
At the annual flagship APSARA conference (云栖大会) held in September 2024, Alibaba Cloud showcased its latest advancements in AI with the introduction of the Tongyi Qianwen 2.5 series. This upgraded version of its LLM offers a wide range of AI-enabled features, with enhanced capabilities by 18% compared to the 2.0 version launched in June 2024. The Tongyi Qianwen 2.5 model supports over 100 multimodal applications in 29 languages, making it one of the most powerful open-source LLMs available. Additionally, it is designed to outperform competitors such as META’s Llama 3.1 across a wide spectrum of tasks.
Open-Source Expansion and Cost Reduction
As part of its broader AI strategy, Alibaba has made its LLM offerings open-sourced to promote industry development and reduce adoption barriers. The company has also significantly lowered the pricing of selected AI models by over 80%, making it easier for enterprises to adopt advanced AI solutions. This move is expected to drive further AI integration across various industries, helping businesses reduce costs and improve efficiency through Alibaba’s AI-driven solutions.
Cloud Revenue and Future Growth Prospects
Alibaba Cloud is poised for continued growth, with management confident that core cloud revenue will return to double-digit growth in the second half of FY25. The increasing demand for AI-driven cloud solutions is expected to play a pivotal role in this growth. The company’s commitment to AI infrastructure is underscored by the expansion of its CAPEX investments, reflecting the strong demand for its cloud computing services. Alibaba is set to maintain this level of investment in the near term, ensuring that its cloud offerings remain competitive and in line with evolving market demands.
Dingtalk AI Agent and AIGC Tools
Alibaba’s Dingtalk AI Agent, now fully open-sourced, provides a robust platform for businesses to integrate AI-driven solutions into their operations. The agent covers multiple functions, including sales, IT, HR, administrative work, finance, and customer service, across various verticals like content creation, manufacturing, retail, and healthcare. As of March 2024, over 2.2 million companies have adopted Dingtalk AI, with more than 1.7 million active corporate users. The agent’s capabilities in memory, inference, and execution have been enhanced, making it a powerful tool for enterprises looking to automate and optimize their processes.
In addition, Alibaba has developed Tongyi Wanxiang Studio, an AI-Generated Content (AIGC) production tool aimed at Taobao/Tmall merchants. This tool supports multi-modal capabilities, such as text-to-graphics and graphics-to-video conversion, and has been designed to help small- and medium-sized enterprises (SMEs) create marketing content more efficiently and at lower costs. Wanxiang Studio serves over one million merchants and produces more than 100,000 pieces of content daily, resulting in estimated savings of over CNY 1 billion for SME customers.
Future Outlook: AI and Cloud Expansion
Alibaba remains focused on driving growth through its AI and cloud businesses. The company’s strong performance in cloud revenue, coupled with the rapid adoption of AI-enabled solutions across various industries, positions it well for future growth. As AI and cloud integration continue to shape the digital landscape, Alibaba’s strategic investments in these areas will likely play a crucial role in maintaining its competitive edge and expanding its global presence.
