Alibaba’s AI Business Is Booming, But Its Profits Basically Disappeared

THE GIST

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Alibaba is making a calculated bet that spending heavily now on AI infrastructure and quick commerce will pay off later. In the meantime, the profit line looks alarming, and the market isn’t sure what to make of it.

WHAT HAPPENED

Alibaba reported fiscal fourth-quarter results on Wednesday that presented two very different companies depending on which line you looked at. Revenue came in at 243.4 billion yuan (about $36 billion), up 3% year on year, though that missed analyst estimates of 247.1 billion yuan. Stripping out divested businesses, revenue grew 11%.

The cloud and AI business was genuinely impressive. Cloud Intelligence Group revenue rose 38% to 41.6 billion yuan, with AI-related product revenue reaching 9 billion yuan, extending a streak of triple-digit year-on-year growth to eleven consecutive quarters. AI now represents around 30% of the cloud division’s external revenue. Adjusted EBITA in the cloud segment jumped 57%.

Everything else was harder to look at. Adjusted EBITA for the whole group collapsed 84% to 5.1 billion yuan, down from around 32 billion yuan a year earlier, as the company poured money into AI infrastructure and its quick commerce delivery push. China e-commerce adjusted EBITA dropped 40% despite revenue growing 6%, with quick commerce revenue up 57% but requiring heavy subsidy spending to sustain that growth. Free cash flow swung from an inflow of 3.74 billion yuan to an outflow of 17.3 billion yuan. Adjusted net income fell to around 86 million yuan, from roughly 30 billion yuan twelve months prior, an almost total erasure of core earnings. The company also posted its first operating loss since 2021.

On a statutory basis, net income doubled to 25.5 billion yuan, but that largely reflected mark-to-market gains on equity investments rather than operating performance.

Alibaba shares fell around 2% in premarket US trading.

WHY IT MATTERS

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The bull and bear cases for Alibaba are both visible in these numbers, sitting right next to each other on the same income statement.

The bull case starts with cloud. A 38% revenue increase in a single quarter is not incremental progress, it is genuine acceleration. AI-related revenue growing at triple-digit rates for eleven consecutive quarters means this is not a one-quarter anomaly. Alibaba has spent heavily building its Qwen family of AI models, developing its own chips to reduce dependence on US suppliers, and scaling its data center infrastructure. That investment is now visibly translating into revenue. CEO Eddie Wu said the company expects annualized recurring revenue from AI model and application services to surpass 10 billion yuan in the June quarter and reach 30 billion yuan by year-end. Those are significant numbers that suggest the cloud business is entering a phase of genuine commercial scale.

The bear case starts with the profit collapse. Adjusted EBITA of 5.1 billion yuan on revenues of 243 billion yuan implies a margin of around 2%, down from something closer to 13% a year ago. That is not a blip. It is the result of simultaneously funding an AI infrastructure buildout and a price war in quick commerce against Meituan and JD.com, two well-resourced competitors who are not going to concede ground cheaply. Quick commerce is a strategically important market in China, covering instant delivery of food, groceries, and consumer goods, and Alibaba cannot afford to lose it. But winning it is expensive, and right now the company is effectively paying to build two capital-intensive businesses at once.

The competitor read is instructive. JD.com reported the same day that its quarterly revenue rose 5% while net income fell 53%, as fulfillment and marketing costs rose. JD’s stock rose 8% on those numbers because the market read them as better than feared. Meituan’s stock also rose sharply. Alibaba fell. That gap reflects a specific market concern about Alibaba: investors are not questioning whether AI is a real opportunity, they are questioning whether Alibaba can fund the delivery war and the AI buildout simultaneously without a prolonged period of depressed earnings.

The international e-commerce business is one genuine positive that gets less attention. That segment’s adjusted EBITA loss narrowed from 3.57 billion yuan to 138 million yuan, approaching breakeven. For a division that was burning cash at significant scale a year ago, that is a meaningful improvement in unit economics.

WHAT’S NEXT

Alibaba has committed to more than $100 billion in AI and cloud investment over five years and 380 billion yuan in infrastructure spending over three years. The question for the next several quarters is whether cloud revenue can accelerate fast enough to fund those ambitions while the delivery war absorbs capital on the other side.

The company’s own target of 30 billion yuan in AI annualized recurring revenue by year-end would be a meaningful proof point. If that lands on schedule, the argument that current spending is building durable competitive advantage becomes considerably easier to make. If it does not, the margin damage is going to be difficult to explain away.