Foreword

Not long ago, Guru Club released the first Alibaba F2Q25 earnings update report, focusing on tracking the company's outstanding shareholder return rate.

After the release of Alibaba's F2Q25 results, the market generally focused more on accelerating the recovery of core businesses such as e-commerce and cloud computing, as well as the high quality of its performance growth. Alibaba led the industry competition to provide greater value to customers, and Ali's management fulfilled its growth commitments.

We believe that the progress of Alibaba's "AI-driven" strategy is also worth paying attention to.

Although China's listed leading Internet and technology companies have actively deployed in the AI field, they do not fully reflect their AI capabilities in the financial results, unlike the well-known "Magnificent Seven" stocks in the US stock market. However, the current business performance can explain at least one thing - breakthroughs and changes are happening. Based on current trends, we believe that it is only a matter of time before the final AI valuation is reflected in the financial report data.

Therefore, we are proactively tracking Alibaba's AI strategic layout and progress. We have found that Quark, known as one of the "Four Little Dragons of Alibaba," has made unexpected progress in the past two quarters.

We believe that this change will play an important driving role in the timing of Alibaba's AI potential release and the reassessment of investment value. It can be further inferred that Ali's AI strategy has taken the lead in making breakthroughs among China's listed Internet and technology companies.

Ⅰ Alibaba's "AI-driven" Strategy and Quark's Unique Position

In today's global technology field, artificial intelligence (AI) technology has become the core of a new round of business competition. This business battle, known as the “AI battle”, constantly affects the nerves of global tech firms. They are using AI technology and products as weapons to engage in fierce market competition and internal renovation.

Alibaba is also actively planning its AI layout to follow the trend of the times.

In fact, AI technology has long been regarded as one of the key factors driving Alibaba's future business growth. Ali launched its basic large language model Tongyi Qwen in April 2023 and identified "AI-driven" as one of its strategic priorities in September 2023.

In May 2024, Alibaba explained in its "2024 Fiscal Year Letter to Shareholders" the direction of its AI-driven strategy: first, basic large language model (LLM), second, cloud computing business, and third, application scenarios.

Corresponding to specific businesses, the first refers to Ali's Qwen LLM,; The second refers to Alibaba Cloud's computing business, and the third is the representative AI applications extended from Alibaba's various C-end businesses.

2024 is widely recognized as the Year of AI Implementation. China’s domestic Internet companies have launched in succession AI products representing their own C-end layout, such as ByteDance Doubao, Baidu Wenxiaoyan, etc.

In contrast, we believe that Quark, which is presented in other businesses of Alibaba's financial report, can represent Ali's C-end AI products for three following reasons:

1. Quark is an intelligent product independently operated by Alibaba and has been laying out in the AI field for a long time. Quark's positioning in 2018 was an intelligent search engine with AI technology at its core. It places AI technology at the core of its product strategy from the beginning. After years of investment and efforts, Quark has gained a first mover advantage in both AI products and technology.

2. Quark's comprehensive product strength has entered the forefront of domestic and even global AI products. According to the latest data from the AI product list produced by a well-known domestic third-party data service agency, Quark ranks fourth globally and first in China. The "Q2 2024 iOS AI Products Strength Ranking" released by QiMai also shows that Quark won the industry championship with the highest rating.

3. Quark features a leading word of mouth among young people. Capturing young users means seizing the future of technology and business. Young people have a higher acceptance of new products with a larger user base. QuestMobile data shows that the general student population under the age of 24 in China has reached 261 million. It is reported that the proportion of young people under the age of 25 among Quark users has reached half, and that of young people on Quark PC even exceeds half.

We believe that Quark, which has already entered the top tier of global C-end AI applications, is becoming the vanguard of Alibaba's AI strategy in the field of C-end applications, bringing more room for imagination to the company’s AI-driven strategy.

Through Quark, we can also gain a deeper understanding of the value of Ali's AI strategy.

Ⅱ Full Manifestation of AI Strength: Quark PC Leads Far Ahead

Firstly, let's briefly review the development trajectory of Quark and see how it gradually rose to become the "ace" of Alibaba's C-end AI applications.

Since its establishment, Quark has defined search business as intelligent search and has been deeply involved in the application of AI technology in products.

In November 2023, Quark released the Quark LLM, marking its further advancement in the field of AI. At that time, the Quark LLM successively topped the two authoritative evaluation lists of C-Eval and CMMLU, with multiple performances superior to GPT-4, reflecting the advantage of Quark in the LLM capabilities.

In July 2024, Quark upgraded its "Super Search Box" and launched a one-stop AI service centered around AI search; In August 2024, it released a new PC terminal. Quark has rapidly upgraded its multi terminal products to products that fully utilize AI capabilities.

According to public information, Quark PC has upgraded a series of functions such as AI search, AI writing, AI PPT, and AI file summary. And it can provide users with one-stop information retrieval, creation, and summary through "system-level all-scene AI".

Taking Quark PC as an example to analyze its AI capabilities. Since the release of the all-new Quark PC, its traffic and user base have grown rapidly, while the categories of vertical AI applications continue to increase with the expansion of application scenarios. The launch of new products will further attract new users and downloads, forming a positive feedback loop, which is a typical "flywheel effect".

According to the latest data from PConline, Quark PC ranks first in the download volume of AI applications on domestic computers in 2024, becoming the top-pick AI PC product among young people. The download volume of Quark PC is significantly higher than that of the second-ranked Doubao.

Analyzing the reasons for the success of Quark PC, we have the following conclusions:

1. The comprehensive and deep integration of Quark AI functions is one of the core driver for its further growth in traffic this year. In the scenario of using productivity tools, a single AI plugin often can only meet scattered needs, while Quark seamlessly integrates these needs through its "system-level all-scene AI" capability, improving user experience and stickiness, making AI a versatile assistant for users' work and learning. For example, Quark PC products integrate comprehensive AI applications and rich information services, allowing users to upgrade their computers to AI style without upgrading their hardware.

2. The product strength is excellent enough. Quark PC not only has superior performance, but also is convenient and easy to use. Its friendly interface design and convenient usage process provide a unique experience of information collection, processing, and summarization, especially in academic search, AI topic search, AI writing, and AI PPT functions.

3. According to the life cycle theory of Internet products, the large-scale liquidation of Quark PC has not yet occurred. For one thing, many AI products or features in Quark's product matrix, including the PC terminal, are free; For another, Quark has been very restrained in commercialization and has always adhered to long-termism and craftsman spirit to polish products and accumulate users. Alibaba's "User First" principle is well reflected in Quark.

Therefore, it can be concluded that Quark is currently in the mid-term stage of the fastest user growth, and its potential commercial value release in the future will be more eye-catching.

From the perspectives of data and scenario verification, Quark has enormous potential for commercialization in the future.

Quark is still in a period of rapid development without sacrificing user experience.

According to the latest statistics from the QbitAI think tank, Quark not only leads in user scale among domestic AI products, but also ranks first in the industry in terms of growth rate and user stickiness. According to data from the QbitAI, the number of newly downloaded quarks from January to October 2024 is close to 270 million, way ahead of the second place Doubao's 140 million; In respect of user stickiness, the top-ranked Quark has a three-day retention rate of over 40% and a seven-day retention rate of nearly 30%, both far exceeding the industry's requirements for excellent product retention rates.

Another point is the rich scenarios, which also determines the high conversion and growth potential of users. One of Quark's core advantages is its deep accumulation in vertical application fields. Taking "AI Search" for learning scenarios as an example, Quark has upgraded its "AI Search" product in an all-round way to further solve the problem of users being unable to find questions or understand difficult problems. This has made the process of searching and solving questions faster and more effective. Quark's "AI Search" is also the first search product to complete a comprehensive AI upgrade. Behind this is Quark's early layout and years of deep cultivation in the field of learning. Quark has long insisted on building high-quality learning content and has the largest learning database in China, which is applied to model training to ensure that the content explained by AI is accurate and evidence-based.

Deep cultivation of vertical scenario applications will bring new growth and commercialization opportunities to Quark. According to the "Summer Development Report on AI Productivity Tools" released by Aurora Mobile's MoonFox Data, AI productivity tools are showing a high-speed growth trend on the user side, and the growth rate has significantly increased. Among them, Quark App leads the way in acquiring new users during the summer vacation.

Ⅲ. When will Alibaba Begin to Deliver the Strategic Value of "AI-driven"?

Firstly, our conclusion is that benefiting from the market's attention to AI applications and the long-term accumulation of advantages in Alibaba's AI applications such as Quark, it can help increase the proportion of overall AI related business valuation in Alibaba's market value.

The main reasoning logic is concentrated in the following parts:

(1) Market Focus on the Value of AI Applications

We observe that the market focus has shifted from LLM capabilities to practical AI application scenarios, as well as real user usage and retention.

For AI applications, the smooth transition from the concept and idea verification stage to the actual user scenario application stage has achieved substantial transformation of innovative ideas and technological achievements into large-scale user operations, and future new commercialization opportunities are gradually opening up imaginative space.

We believe that the future commercial potential of AI applications such as Quark has begun to emerge through the release of user value. The reason is that Quark has identified PMF (Product Market Fit), which will drive Quark to open up new incremental markets and raise the overall user base and usage to a new level.

(2) Exploration of Valuation Methods for AI Applications

For valuation methods of unlisted companies, investment banks generally use market approach, income approach, cost approach, and integrated approach.

We believe that at the current stage of development, it is relatively appropriate to use the market approach for valuing AI applications, which has certain rationality and fairness.

Among them, market approach includes market multiples, latest financing price method, and industry indicator method. The key to market approach is to find comparable assets or benchmark companies, and these assets or companies have publicly available price information in the market. Taking the market approach as an example, we will attempt to make valuation predictions for AI applications represented by Quark.

Comparative Valuation: Valuation can partially refer to the latest valuations of AI applications such as Perplexity. It is reported that Perplexity's latest fundraising valuation has reached $9 billion. We calculated its valuation and monthly active user (MAU) proportionally with Quark, and based on this path, we found that the estimated volume of Quark will be much higher than that of Perplexity.

SOTP (sum-of-the-parts): The market divides Quark’s functions into large language models, search tools, and "AI+office" applications, which can be used to value some of the businesses of companies such as Kunlun Tech and Kingsoft Office. Due to the existence of products such as Quark Cloud that have a large user base, the corresponding valuation should be higher than the simple sum of some business valuations.

(3) The Impact on Alibaba's Market Value

The increase in AI application valuation will drive the overall valuation level of Alibaba's AI related business. We believe that once the market's valuation of Ali's AI applications exceeds a certain threshold, it will trigger a reassessment of Ali's "AI-driven" strategy.

Driven by the growth momentum of AI applications, the market will continue to reflect on the necessity and weight of Alibaba's "AI-driven" strategy reassessment. In this process, quantitative changes will ultimately lead to qualitative changes. The sustained and rapid growth of Alibaba's AI product user base will undoubtedly bring about a significant transformation in Alibaba's positioning and value in the capital market. We look forward to the arrival of this day.