Investing.com -- Bernstein upgraded Alibaba (NYSE: BABA ) to Outperform from Market-Perform, citing growing optimism around AI-driven growth in Alicloud and improved capital allocation.

The firm also raised its price target to $165 from $104 for U.S.-listed shares and to HK$161 from HK$102 for its Hong Kong listing.

“Alibaba’s shares have rallied strongly since China’s DeepSeek moment, as investors increasingly valued Alicloud in a SOTP calculation,” Bernstein analysts wrote.

While AI enthusiasm may have peaked temporarily, they believe Alibaba’s earnings trajectory is now more positive, thanks to a more disciplined approach to capital allocation and a stronger AI-driven market structure.

A key part of the firm’s bullish thesis is Alibaba’s shift in investment strategy. “A better outlet for Alibaba’s investment dollars” is emerging, with the company focusing on AI infrastructure rather than competing aggressively in global e-commerce, says Bernstein.

The firm estimates that for Alicloud to offset depreciation costs from its RMB 30 billion+ in quarterly capex, it needs to grow revenues by 25-30% in FY3/26.

Given AI’s higher margins compared to traditional cloud computing, Bernstein expects Alicloud to be a key contender alongside Huawei and Tencent in China’s AI infrastructure race.

Beyond AI, domestic e-commerce improvements also contribute to Bernstein’s optimism. Alibaba’s 9.4% customer management revenue (CMR) growth in Q3 points to a stronger monetization strategy, supported by ad tech improvements and rising Taobao commissions.

“Our channel checks have pointed to improvement in the company’s ad product, which should help to support CMR growth,” Bernstein noted.

Looking ahead, Bernstein expects revenue acceleration in Alicloud during the March and June quarters, with investors likely to buy on any dips as AI growth details emerge.