AI Momentum Soars While Profitability Takes a Hit
The global race to build advanced artificial intelligence infrastructure has pushed major tech companies into an era of unprecedented investment—and China’s Alibaba is no exception. As the company doubles down on cloud computing, chip development, and its flagship Qwen AI platform, the Alibaba AI arm is becoming one of the company’s fastest-growing engines. Yet this powerful momentum comes at a cost.
In its latest quarterly earnings, Alibaba showcased an impressive 34% surge in cloud revenue—one of the strongest growth rates the business has seen in years. But the celebration was tempered by the reality of rising AI-related expenses, deep consumer subsidies, and expanding data center costs that ultimately drove profit sharply lower. The tension between explosive AI growth and shrinking margins is now central to understanding Alibaba’s strategic future.
Below is a detailed breakdown of what’s powering Alibaba’s AI success, why profitability is tightening, and what investors should watch as China’s tech giant wages an increasingly competitive battle across AI, cloud, commerce, and quick-delivery markets.
Alibaba’s Cloud Division Delivers 34% Growth, Powering AI Ambitions
Alibaba Group’s cloud business—the home of its Qwen AI model suite—produced one of the company’s strongest results this cycle:
- Cloud revenue surged 34%, beating analyst expectations
- Overall revenue rose 5% to 247.8 billion yuan ($35 billion)
- Chinese e-commerce revenue jumped 16%, despite fierce competition
This renewed momentum shows that Alibaba is successfully expanding its cloud footprint while continuing to hold its ground in online retail—an important achievement given the three-way battle with JD.com and Meituan.
Yet beneath the topline growth lies a deeper story: massive spending to support its AI infrastructure and customer acquisition efforts.
Heavy Spending Weighs on Profitability
Despite strong revenue performance, Alibaba’s net income was cut in half. Profit fell to 20.99 billion yuan, driven by:
- Deep discounting and subsidies to attract shoppers
- A surge in marketing spending
- Major investment in data centers
- Rapid expansion of AI model development
Sales and marketing expenses alone more than doubled, signaling how aggressively Alibaba must fight for consumer attention in China’s crowded digital market.
The company also acknowledged that the soaring costs of AI infrastructure, including advanced hardware and new data centers, contributed significantly to shrinking margins.
CEO Eddie Wu Pushes Back on ‘AI Bubble’ Concerns
The recent global pullback in AI-related stocks has raised fears that companies are overbuilding data centers without a clear monetization path. But CEO Eddie Wu offered a confident rebuttal:
“Looking ahead to the next three years, we don’t really see much of an issue in terms of a so-called AI bubble.”
Wu argues that demand for AI services continues to grow faster than expected, and Alibaba intends to invest “aggressively” to remain competitive. His stance contrasts sharply with Chairman Joe Tsai’s remarks earlier this year when he warned of industrywide overinvestment.
Still, the strategy is clear: Alibaba sees AI as the defining battleground of the next decade and is willing to sacrifice short-term profitability to secure long-term leadership.
Qwen AI App Relaunch Sees 10 Million Users in 4 Days
One of the brightest spots for the Alibaba AI arm was the explosive relaunch of its Qwen app—China’s answer to OpenAI’s ChatGPT. The app:
- Attracted 10 million users in just four days
- Became one of China’s fastest-growing AI services ever
- Signaled renewed consumer interest in local AI platforms
Alibaba plans to transform Qwen into a full AI agent capable of:
- Shopping on Taobao
- Mapping and navigation
- Travel booking
- Education tools
- Personal productivity tasks
This positions Qwen as an ecosystem-driven AI assistant that can integrate deeply with Alibaba’s retail and digital services.
Competition Intensifies in China’s AI Market
While U.S. giants like OpenAI and Google are blocked from China, domestic rivals are expanding rapidly:
- ByteDance’s Doubao: 172+ million monthly active users
- Tencent’s Yuanbao: leveraging WeChat for distribution
- DeepSeek and other emerging AI startups
- Huawei and domestic chipmakers working around chip export restrictions
Although Alibaba has a strong start, the competitive environment is fierce—and consumer willingness to pay for AI tools in China remains low. Unlike Western markets, Chinese users have shown limited appetite for subscription models, forcing companies to find alternative monetization paths.
U.S. Chip Restrictions Remain a Major Obstacle
China’s tech giants are still grappling with U.S. export controls that limit access to Nvidia’s most advanced chips. Domestic alternatives exist, but supply remains constrained.
Alibaba is responding by:
- Developing homegrown accelerators through its T-Head semiconductor unit
- Building a “full-stack” ecosystem from foundational models to AI hardware
- Partnering with Huawei-like efforts to localize critical infrastructure
The race to achieve AI self-sufficiency is becoming a central theme in Alibaba’s long-term strategy.
China’s Stimulus and E-commerce Subsidies Boost Revenue but Hurt Margins
Alibaba isn’t the only tech giant exceeding expectations this year. JD.com, PDD Holdings, and other large Chinese platforms have also reported stronger-than-expected results. Beijing’s stimulus, combined with billions in subsidies, has reignited consumer spending in:
- Online shopping
- Food delivery
- Quick commerce (“fast delivery of meals and goods”)
However, these subsidies significantly erode margins. As Alibaba expands its quick-commerce footprint, the company acknowledges that customer acquisition costs and rapid delivery logistics remain expensive.
Still, Alibaba reiterated an ambitious target:
Expand quick-commerce gross merchandise value (GMV) to 1 trillion yuan within three years.
Alibaba’s $380 Billion AI Investment Plan Sets It Apart
Chinese tech companies have spent cautiously on AI compared with U.S. hyperscalers. But Alibaba stands out with its bold spending plan:
- 380 billion yuan (≈ $54 billion) committed over three years
This dwarfs many domestic rivals. For example:
- Tencent spent only ~$1.8 billion in the last quarter
- Other Chinese firms remain far more conservative
Investors have rewarded Alibaba’s willingness to invest big. Its shares have nearly doubled year-to-date, driven by confidence in its AI and cloud roadmaps.
Still, the road ahead requires balancing growth with discipline. Bloomberg Intelligence warns that Alibaba will likely:
- Sacrifice e-commerce margins through FY 2026
- Maintain elevated R&D spending
- Slow down share buybacks and dividends
- Increase capital expenditures across cloud and AI
This reflects a long-term strategy, not a quick turnaround story.
Cloud Order Backlog Growing Faster Than Infrastructure Capacity
One of the most revealing insights came from CEO Eddie Wu:
“Our Alibaba Cloud server infrastructure is seriously lagging behind the growth rate of customer orders.”
This signals two things:
- AI demand remains extremely strong, despite market volatility
- Alibaba must continue scaling data-center capacity—quickly
Growing order backlogs can be a bullish sign, but only if Alibaba can expand fast enough to meet demand.
Alibaba’s AI Future Looks Powerful—But Comes with High Costs
Alibaba’s latest results highlight a company undergoing rapid transformation. The Alibaba AI arm is outperforming expectations, cloud growth is accelerating, and Qwen is gaining early traction. At the same time, heavy spending, geopolitical constraints, and intense competition continue to pressure profitability.
For long-term investors, Alibaba’s strategy resembles that of the U.S. hyperscalers:
build the infrastructure now, monetize the AI ecosystem later.
The coming years will be critical. If Alibaba can scale cloud capacity, develop competitive AI chips, and convert Qwen’s user growth into sustainable revenue, the company could secure a leading position in Asia’s AI revolution.
But for now, the message is clear: Alibaba is choosing growth—even if it means sacrificing short-term profitability to stay ahead in the global AI arms race.