Morgan Stanley has identified a pivotal shift in the cloud computing industry, heralding a new cycle of price increases after two decades of decline.
This new environment, according to their report, positions Alibaba as a top pick, with projections that China's AI cloud market will grow at a compound annual rate of 72% to reach 218 billion yuan by 2029. The key insight is that this trend offers significant potential for margin improvement for Alibaba Cloud, going beyond mere revenue expansion.
So, what triggered this change? A confluence of three factors—price, cost, and demand—has reshaped the landscape. First, the long-standing belief that cloud prices only go down was shattered by global leaders. In early 2026, AWS raised prices for some GPU capacity blocks by about 15%, and Google Cloud announced hikes for its network services. This global signal was quickly followed by domestic players in China, with companies like Wangsu and UCloud raising their prices, and Tencent adjusting its AI model billing.
Second, the cost of essential hardware is surging. For instance, server DRAM contract prices were projected to jump by approximately 90% in the first quarter of 2026. This sharp rise in component costs provides a strong justification for cloud providers to pass these expenses on to customers, making the price hikes more sustainable.
Third, demand for AI computing remains incredibly strong. A recent report noted that ByteDance is seeking access to a massive cluster of NVIDIA's latest Blackwell GPUs through a Malaysian operator. This illustrates that Chinese companies' demand is so robust that they are actively pursuing computing resources outside of mainland China, signaling a willingness to absorb higher costs.
For Alibaba, this is more than just a favorable market trend. The company has already demonstrated accelerating growth, with its cloud revenue increasing from 26% year-over-year in the June 2025 quarter to 34% in the September quarter. Morgan Stanley's analysis suggests that this price hike cycle creates powerful operating leverage. A hypothetical 10% price increase on just 20% of renewing contracts could boost Alibaba Cloud's EBITA margin by 4 percentage points. This means profits could grow substantially faster than revenue, fundamentally altering the company's financial profile.
- IaaS (Infrastructure as a Service): A cloud computing model that provides virtualized computing resources over the internet. It's the foundational layer where users can rent servers, storage, and networking.
- EBITA (Earnings Before Interest, Taxes, and Amortization): A measure of a company's operating profitability, calculated as revenue minus expenses, excluding tax, interest, and amortization.
- Operating Leverage: The degree to which a company can increase operating income by increasing revenue. High operating leverage means a small change in revenue can lead to a large change in operating income.