Alibaba Raises $10 Billion for AI — Why BofA Is Looking Past the Dilution

On August 25, BofA Securities analyst Joyce Ju reiterated a Buy rating and $172.00 price target on Alibaba Group Holding Limited (NYSE: BABA) . The rating affirmation follows one of the largest capital raises by Alibaba. The tech giant raised HK$80 billion ($10.2 billion) in Hong Kong's largest follow-on share offering to invest in its AI infrastructure.

The demand attracted $28 billion of orders, including $6 billion from long-only and sovereign investors. Following the news, the stock plunged as much as 10% in Hong Kong amid fears of capital burning and shareholder dilution. BofA held firm anyway.

AI Spend is Already Pressuring Cash Flow

According to Alibaba Group Holding Limited (NYSE: BABA ), 100% of the net proceeds from the sale will go to Alibaba's full-stack AI capabilities. However, investors are worried because the tech giant's AI push is increasingly becoming expensive and the recent sale makes the near-term picture even messier.

BofA itself has acknowledged that the placement will likely weigh on sentiment considering the shareholder dilution and depreciation tied to AI infrastructure deployment. There is also the uncertainty tied to how long it takes for capex to remain elevated and possibility of further funding.

No wonder shares plunged following the announcement. The company recently posted June quarter results, with revenue just under 269 billion yuan ($40 billion), meeting expectations. Alibaba's adjusted net income fell 38% to 20.7 billion yuan, which was well below consensus.

The more important numbers in this thesis are its capital expenditure ones. The company reported a CapEx of RMB 67.68 billion ($9.98 billion) for the quarter ended June. This increase was attributed to continued AI infrastructure investment, which clearly reflected on its cash flow.

Free cash flow deteriorated to a roughly $6.6 billion outflow, with BABA attributing the fall to increased cloud infrastructure spending. While the company did end up with RMB 474.51 billion of cash and other liquid investments, it still demonstrates the issue of growing amount of capital required for sustaining the AI buildout.

Despite fears of shareholder dilution and elevated AI spending, BofA chooses to remain bullish on BABA on the premise that it has started to generate tangible returns from its AI investments. The firm noted that the proceeds would lift pro forma net cash from $31 billion to over $41 billion before deployment.

The core argument for BABA,however, rests on cloud momentum. The company's AI Cloud and Compute revenue climbed 45% year-over-year last quarter, Cloud-EBITA margin expanded to 12%, and AI-related product revenue reporting triple-digit growth for twelve consecutive quarters. The numbers imply how the company is slowly showing that AI investment spending can lead to both faster growth and improving operating leverage.