Alibaba Group Holding Limited

(New York Stock Exchange)
Back to all articles
Slightly Bearish -20

Can Alibaba (BABA) Cover the AI Bill?

AI infrastructure Capital raising Company update AI-generated analysis

📈 Alibaba Group is reportedly joining Dongshan and JPMorgan as a cornerstone investor in the Hong Kong listing of Dongshan to support AI equipment manufacturing.

💰 The company raised HK$80 billion by selling shares, with most proceeds allocated to computing infrastructure and AI data center upgrades.

☁️ Alibaba Cloud revenue grew 45% in the June quarter, while adjusted profit more than doubled to RMB5,628 million.

🚀 Sales of AI-related products within the cloud unit have expanded at triple-digit rates for twelve straight quarters.

🏆 Omdia ranked Alibaba Cloud as the number one player in China's AI cloud market.

💻 Over 20 industries utilize Alibaba's own Zhenwu chips for their workloads outside of the company.

📉 China e-commerce revenue fell in the June quarter due to weaker transaction activity.

🛒 Quick commerce growth and improved per-order economics helped stabilize adjusted profit at RMB39,749 million for the e-commerce group.

💸 Free cash flow was an outflow of RMB44,670 million in the June quarter, primarily attributed to cloud infrastructure spending.

📉 AI Labs and Applications posted an adjusted loss of RMB13,861 million, widening significantly from a loss of RMB3,224 million a year earlier.

📊 Reported earnings per ADS fell 79% in the June quarter due to a goodwill write-down and a European fine provision.

📈 The stock trades at 16.42 times estimated fiscal 2027 earnings, slightly above the sector median of 15.40 times.

🔮 Analysts project adjusted earnings per share will grow 68.34% in fiscal 2027, which ends next March.

⚠️ Investor concern regarding how Alibaba funds its AI spending has risen, as cloud profit remains small relative to total costs.

Bullish Signals
  • Alibaba Cloud revenue grew 45% in the June quarter, demonstrating strong demand for its computing power and AI tools.
  • The adjusted profit of the AI cloud unit more than doubled, rising 133% to RMB5,628 million in the June quarter.
  • Sales of AI-related products within Alibaba Cloud have grown at triple-digit rates for twelve consecutive quarters.
  • Omdia ranked Alibaba Cloud as the first place holder in China's AI cloud market, solidifying its regional dominance.
  • The company successfully deployed its own Zhenwu chips to support workloads for over 20 industries outside of Alibaba.
  • Quick commerce growth and improved per-order economics helped the e-commerce group maintain adjusted profit at RMB39,749 million despite revenue declines.
Risk Factors
  • China e-commerce revenue fell in the June quarter due to weaker transaction activity, creating a reliance on this segment to fund AI expansion.
  • Free cash flow turned into an outflow of RMB44,670 million in the June quarter, driven largely by heavy cloud infrastructure spending.
  • AI Labs and Applications reported a significant adjusted loss of RMB13,861 million, widening from a loss of RMB3,224 million the previous year.
  • Reported earnings per ADS fell 79% in the June quarter, partly due to a goodwill write-down and a European fine provision.
  • The stock trades at 16.42 times estimated fiscal 2027 earnings, which is above its own five-year average of 13.83 times.
  • Investor worry regarding how Alibaba pays for its AI spending has been rising, as cloud profit currently covers only a fraction of the total bill.
Full Analysis
Alibaba Group (NYSE:BABA) is increasing its investment in artificial intelligence, reportedly becoming a cornerstone investor in Dongshan, a manufacturer of circuit boards and optical parts for AI equipment. This strategic move follows a recent cash raise of HK$80 billion from selling shares, primarily intended to fund computing infrastructure, AI data centers, and cloud upgrades. The article highlights that while the company is aggressively expanding its AI capabilities, this spending is currently outpacing the revenue generated by its operations. The core financial tension for Alibaba lies in its ability to grow cloud profits fast enough to cover the substantial costs associated with its AI push. While the AI cloud unit demonstrated strong performance with 45% revenue growth and adjusted profit more than doubling in the June quarter, the broader business faces headwinds. Specifically, China e-commerce revenue declined due to weaker transaction activity, yet the company relied on this segment's profitability to offset significant losses in its AI Labs and Applications division. Financial metrics reveal a widening gap between spending and earnings. Free cash flow turned into an outflow of RMB44,670 million in the June quarter, driven largely by cloud infrastructure spending. Additionally, AI Labs and Applications reported an adjusted loss of RMB13,861 million, a significant increase from the previous year. Despite these challenges, Alibaba Cloud maintains its position as the leader in China's AI cloud market, with sales of AI-related products growing at triple-digit rates for twelve consecutive quarters.