On August 20, Alibaba Group (NYSE:BABA) reported that quarterly net profit had fallen 75% from a year earlier, even as revenue for the April to June period climbed 9%. The headline number looks alarming on its own. But dig into where the money actually went and a different picture forms: this looks like a company pouring cash into its own future rather than one losing its grip on the present. Cloud and AI revenue jumped 45% in the same quarter, and that tension between short-term pain and long-term positioning is the whole story here.
Bull Case: Cloud Growth Finally Has Teeth
Revenue from Alibaba’s AI cloud and computing business climbed 45% to 48.44 billion yuan for the quarter ended in June, and the AI model-as-a-service business alone has already topped 16 billion yuan in annual recurring revenue. That is no longer a side project bolted onto an e-commerce giant; it is starting to look like a genuine second engine. Wu told investors he expects the AI spending to break even within three years, based on today’s gross margins, once in-house T-head chips replace the commercially bought processors currently filling Alibaba’s data centers. Those in-house chips are already running at scale on “supernodes,” the massive linked server racks built for AI training and inference, and swapping them in for outside hardware should lift both margins and profitability over time.
Alibaba is also spreading its bets across the AI stack rather than leaning on one layer: it has reorganized into four units covering e-commerce, cloud and computing, AI model applications, and other businesses, and it remains a major investor in AI startup Moonshot, supplying it with cloud infrastructure. For a company built on retail, that kind of AI-wide footprint is a real bet on where growth comes from next.
Bear Case: The Bill For Ambition Arrives
None of that buildout comes cheap. Capex jumped 75% to 67.68 billion yuan for the April-to-June period, as the company bought more CPUs to meet AI agent demand while chip prices rose, and Alibaba has now burned through roughly half of the 380 billion yuan it plans to spend on AI infrastructure through 2029. Adjusted earnings of 8.52 yuan per American Depositary Share missed the average analyst estimate, and on a non-GAAP basis net income fell 38% to 20.7 billion yuan. Part of that hit was a one-time charge: the European Commission fined AliExpress, Alibaba’s international e-commerce arm, 550 million euros in late July for violating the EU’s Digital Services Act, the largest penalty yet issued under that law. Free cash flow swung to negative 44.7 billion yuan, compared with a positive 18.8 billion yuan a year earlier.
Meanwhile, the core domestic e-commerce business, still Alibaba’s biggest segment, saw revenue slide 8% during the quarter to a shade under 111 billion yuan, as a sluggish Chinese economy and stiff competition took their toll, and management does not expect the newer quick commerce unit to turn profitable until fiscal 2029. Wu has also acknowledged that monetization of Alibaba’s frontier AI models remains inadequate today, even as the company keeps funding the long race toward artificial general intelligence.
What Wall Street Is Pricing In
Hedge fund ownership of Alibaba slipped to 102 funds last quarter from 115, a pullback that suggests some institutional money trimmed positions even as the AI story built. Short interest sits at just 1.78% of float, which points to very little organized skepticism about the stock right now. Shares trade at a forward P/E of 20.49, a multiple that assumes real earnings growth ahead but does not look stretched next to the cloud business’s growth rate.
Two Timelines, One Stock
Alibaba is running two clocks at once. One measures a multi-year AI buildout that management says should break even within three years and eventually lift margins as in-house chips take over. The other measures a domestic e-commerce business that is shrinking now and a quick commerce unit that will not turn a profit until 2029. For the AI bet to pay off, that capex has to keep translating into the kind of cloud growth already showing up in the numbers.
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