Amazon.com, Inc. (NASDAQ:AMZN) and Alibaba Group Holding Limited (NYSE:BABA) have more in common than their e-commerce roots suggest. Both are now making enormous bets on artificial intelligence, and cloud computing is emerging as an increasingly important part of their investment theses. But the market is valuing the two companies differently, and their earnings trajectories are beginning to diverge.
Amazon is trading at about 23.6x forward earnings, compared with roughly 17.9x for Alibaba. Wall Street also expects both companies to deliver strong earnings growth, although the trajectory is different. Amazon is coming off a period of rapid earnings expansion partly on the back of its successful strategic investments, while Alibaba is expected to accelerate sharply from a much lower base.
The interesting question is whether that gap is justified, or whether investors are underestimating what Alibaba’s AI investments could eventually do for its business.
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Amazon’s AI investment is already showing up in the numbers
Amazon’s biggest advantage is that it does not have to wait for AI to become a standalone business. AWS is already a massive cloud operation, and AI is helping accelerate its growth.
AWS revenue jumped by a solid 37% year over year in the second quarter to $42.2 billion, its fastest growth in 18 quarters. Amazon also said its AI business within AWS had surpassed an annual run rate of $25 billion, with AI and custom chips each growing at triple-digit rates.
That matters because Amazon is not simply spending money and hoping AI eventually becomes profitable. It is adding AI demand to a business that already generates substantial revenue and operating income.
There is, however, a cost to that growth. Amazon’s heavy AI spending has pushed free cash flow into negative territory, with the company raising its 2026 capital spending expectations to around a staggering $220 billion. Management argues that the spending is necessary because customer demand is already outstripping available computing capacity.
That creates an important test for Amazon. The company needs the colossal infrastructure it is building today to translate into substantially higher earnings and cash flow over the next few years.
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Alibaba is taking the more aggressive AI gamble
Alibaba’s AI story is less mature, but potentially more expansive. Its AI Cloud and Compute Services business grew 45% year over year in the June quarter to roughly $7.1 billion, while AI-related product revenue has continued to grow at triple-digit rates. Alibaba is building what it calls a full-stack AI ecosystem, spanning chips, cloud infrastructure, models and applications.
That strategy is becoming increasingly visible. Alibaba recently unveiled a new AI chip that is expected to enter mass production in 2027 and announced plans for a next-generation model with up to 10 trillion parameters. The company also wants its global data-center capacity to exceed 20 gigawatts by 2032. Alibaba is betting that building its own AI chips, increasingly powerful models, and a huge data-center footprint will give it more control over the technology needed to compete in the global AI race.
The opportunity is not limited to selling computing power. Alibaba can potentially use AI across its entire ecosystem, from cloud services and enterprise applications to Taobao and its other consumer businesses.
However, just like Amazon, Alibaba is spending heavily before those investments have fully translated into profits.
Its latest quarter showed a 75% decline in net income, while capital expenditure surged 75% year over year. Alibaba has also raised additional capital through an HK$80 billion share placement, with the proceeds earmarked for its AI infrastructure. That makes Alibaba a more complicated investment story. The company is showing strong growth in AI and cloud, but shareholders are being asked to absorb the cost of building that infrastructure today.
So what is the market actually paying for?
This is where the valuation gap becomes interesting. At 23.6x forward earnings, Amazon is being valued at a premium to Alibaba. But Amazon’s earnings growth has also been much more visible. AWS is already monetizing AI at scale, while its advertising and retail businesses provide additional sources of cash flow.
Alibaba Group Holding Limited, meanwhile, offers investors a different proposition. Its expected earnings growth is considerably faster from its current base, but a larger portion of that future depends on AI investments paying off.
There is also a meaningful difference in risk. Amazon can fund its AI expansion primarily from the cash generated by its existing businesses. Alibaba is having to invest aggressively while its traditional e-commerce business remains under pressure and its AI businesses are still scaling.
That does not necessarily make Alibaba’s opportunity smaller. In fact, the opposite could be true if its full-stack approach allows it to capture value across chips, cloud, models, and applications.
The bottom line
Amazon and Alibaba are both starting to see AI turn into a real business. The difference is in what comes next. Amazon has a much larger cloud business and is already generating enormous profits from it, while Alibaba is investing aggressively to build out its own AI stack, from chips and models to data centers. For investors, the interesting question isn’t whether AI is benefiting either company. It is whether Alibaba can turn its faster-growing cloud business and full-stack AI strategy into a profit engine capable of closing the gap with Amazon.
Market sentiment
Market sentiment toward Alibaba appears to be softening. The number of hedge funds holding the stock in Insider Monkey’s database fell from 102 at the end of Q1 to 97 at the end of Q2 2026. Meanwhile, the total value of their positions also declined from about $4.1 billion to $2.7 billion.
Amazon, meanwhile, saw institutional interest move in the opposite direction. The number of hedge funds holding the stock increased from 353 to 369, while the total value of their positions rose from about $77.6 billion to $97.1 billion over the same period.
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This article is originally published at Insider Monkey.
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