Alibaba Group (NYSE:BABA) is reportedly about to put more money into AI. According to Bloomberg, it is set to be among the cornerstone investors in the Hong Kong listing of Dongshan, a maker of circuit boards and optical parts for AI equipment. JPMorgan’s asset management arm is reportedly joining it.
But the news arrives about two months after Alibaba raised cash of its own to pay for AI. That sets up the question the stock now hangs on: can cloud profit grow fast enough to cover the bill?
Alibaba sells goods online through Taobao and Tmall, delivers food and groceries through quick commerce, and rents computing power and AI tools to businesses through Alibaba Cloud. The cloud business is working, but it earns far less than the AI push costs, and the shares are priced as if that gap closes fast. If you’re interested in AI investing, we recently compiled a report on 10 Undervalued AI Stocks to Buy Now.
Cloud Is Finally Earning Real Money
The AI cloud unit is the clearest good news. Its revenue grew 45% in the June quarter, and its adjusted profit more than doubled, up 133% to RMB5,628 million. Sales of AI-related products inside it have grown at triple-digit rates for twelve straight quarters.
Omdia ranked Alibaba Cloud first in China’s AI cloud market, and outside customers in over 20 industries run work on its own Zhenwu chips. That matters in a year when Alibaba blamed pricier chip parts for part of its higher spending.
Photo by Arturo Añez on Unsplash
The Shopping Business Still Pays the Bills
The surprise is how much of the load the older business still carries. China e-commerce revenue fell in the June quarter on weaker transaction activity. Yet the e-commerce group’s adjusted profit barely moved, at RMB39,749 million, as quick commerce kept growing and its per-order economics kept improving.
That is still far more than cloud’s adjusted profit. If you own the stock, you are relying on a shopping business whose China revenue is falling to help fund a cloud business that is growing. For investors looking to add more China exposure, our list of 10 Best Chinese Stocks to Buy According to Hedge Funds is worth a look.
Funding the AI Push Cost Shareholders
The AI spending is outrunning what operations bring in. Free cash flow was an outflow of RMB44,670 million in the June quarter, and Alibaba tied the drop mainly to cloud infrastructure spending. AI Labs and Applications, home to Alibaba’s models and the Qwen app, lost RMB13,861 million at the adjusted level, widening from a RMB3,224 million loss a year earlier.
So Alibaba sold shares, raising HK$80 billion in Hong Kong. Most of the money is meant for computing infrastructure, with the rest for AI data centers and cloud upgrades. Bloomberg reported that purchases by co-founder Jack Ma and other executives did little to ease investor worry about how Alibaba pays for AI. Its Dongshan report says worry among investors about AI spending, and about how it is paid for, has been rising.
For a shareholder, the cost is a bigger share count, so each share claims a smaller slice of any future profit. If you’re looking for stocks with low debt and strong free cash flow, check out 10 Stocks With Low Debt and Strong Free Cash Flow.
What the Price Assumes
The shares now trade at 16.42 times estimated fiscal 2027 earnings, the year ending next March. That is slightly above the 15.40 sector median and above its own five-year average of 13.83. Analysts expect adjusted earnings per share to grow 68.34% in that year, which is why the multiple doesn’t look stretched. Investors who want more undervalued growth can see our ranking of 10 Undervalued Growth Stocks to Buy Now.
Adjusted earnings drive that multiple, though, and reported earnings per ADS fell 79% in the June quarter, partly because of a goodwill write-down and a European fine provision.
For now, the answer to the headline is no. Cloud profit is rising fast but is still small next to the cost, which is why shareholders helped pay it. The next quarterly report will show whether cloud and shopping profit are growing faster than the AI Labs loss and the cash outflow.
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This article is originally published at Insider Monkey.
