Chinese e-commerce giant Alibaba (BABA) is heading into its Q2 FY27 earnings report with Wall Street focused on its AI cloud business. Ahead of the report, both Morgan Stanley (MS) and Citi kept Buy ratings on the stock. Citi raised its price target to $193 from $190, while Morgan Stanley lifted its earnings estimates for the next two fiscal years.

Both firms expect cloud revenue to grow by more than 50% year-over-year in the September quarter. However, weaker consumer demand continues to weigh on e-commerce, leaving investors to watch whether AI growth can drive stronger profits.

Currently, Wall Street expects Alibaba to report earnings per share (EPS) of $1.63 for Q2 FY27 on revenues of $40.46 billion.

Morgan Stanley Raises Earnings Estimates

Morgan Stanley analyst Gary Yu reiterated an Overweight rating and a $180 price target on Alibaba stock. The firm kept Alibaba as a "Top Pick" and raised its adjusted EBITA estimates by 7% to 10% for fiscal 2027 and 2028.

The upgrades reflect stronger cloud growth and better margins. Yu expects external cloud revenue to rise 55% year over year in the September quarter, up from 45% in the prior quarter. He also sees the cloud margin climbing to 13.5% from 11.6%, helped by growth in AI services and model-as-a-service products.

This growth could help Alibaba fund its AI work. Morgan Stanley expects cloud earnings to cover losses from the AI Labs and Applications business in the December quarter. It also expects quick-commerce losses to narrow to RMB9.5 billion from RMB10.5 billion in the prior quarter.

E-commerce remains less robust. Morgan Stanley expects customer management revenue to fall 5% year over year, although the like-for-like measure is expected to rise 1%. It forecasts total e-commerce EBITA of RMB37.5 billion, up by a low-single-digit percentage year over year. Excluding quick-commerce, e-commerce EBITA is expected to remain largely flat.

Citi Sees Cloud Profits Funding AI Spending

Citi analyst Alicia Yap maintained a Buy rating on Alibaba stock and raised her price target to $193 from $190. She expects cloud revenue to grow 52% year over year in the September quarter, reaching RMB60.5 billion. Citi also raised its cloud margin forecast to 12.5% from 12%.

Beyond the current quarter, Citi expects cloud revenue to grow 54% in fiscal 2027, 52% in fiscal 2028, and 44% in fiscal 2029. Yap also expects cloud earnings to cover AI model training and investment costs starting in the December quarter. She sees this as a move toward "self-sustaining AI economics," with cloud profits helping pay for Alibaba's AI work.

Citi is also more upbeat on e-commerce profitability. Although it expects reported customer management revenue to fall 5% year over year, it sees better cost control and improving quick-commerce unit economics supporting earnings. The firm raised its forecast for e-commerce group EBITA by 3.6% to RMB38.8 billion, with a projected margin of 20.2%.

Is Alibaba Stock a Buy Now?

Wall Street remains constructive on the stock. Alibaba carries a Strong Buy consensus rating based on eight Buy ratings and one Hold over the past three months. The average BABA price target stands at $191.74, suggesting 81.40% upside from current levels.