Business
Why Alibaba Stock Fell After Earnings Report Despite Big AI Boost
Alibaba Group (BABA) said its AI push is paying off as its cloud growth accelerates. But Alibaba stock took a hit following its fiscal second-quarter earnings report Tuesday, as analysts scrutinized rising investments from the China tech giant that ate into earnings.
Adjusted earnings “missed our estimate due to higher quick commerce losses and increased investment in foundational models and artificial intelligence applications,” Morningstar analyst Chelsey Tam wrote in a research note Wednesday. Alibaba stock closed 2% lower Tuesday following the report, reversing an initial gain in premarket trades.
Alibaba reported adjusted earnings of 4.36 yuan per American depositary share for the September-ended quarter. That’s down 71% from the same period a year earlier and below the 6.03 yuan per ADS that analysts polled by FactSet were forecasting.
Sales increased 5% to 247.8 billion yuan, or $34.9 billion, compared to analyst estimates of 243.8 billion yuan. The company noted that sales growth was 15% when excluding prior revenue from businesses that Alibaba sold earlier this year, including a supermarket and department store subsidiary.
Alibaba’s cloud business grew sales 34% year over year to 39.82 billion yuan, or $5.6 billion. That was ahead of the 27.8% growth Wall Street analysts were forecasting. Cloud growth has accelerated this year from 26% in the company’s June quarter and 17% in Alibaba’s March quarter.
Alibaba Stock: AI Strengths
Alibaba’s size advantages are becoming clear as the AI market grows larger, Alibaba Group Chief Executive Eddie Wu told analysts on the earnings call. Alibaba is the largest cloud provider in China.
“As AI applications scale, more developers and enterprise customers are choosing vendors with full-stack AI technology portfolios,” Wu said, according to a FactSet transcript. “Second, customers are deepening and broadening their use of AI, which is significantly increasing demand for compute, storage and other traditional cloud services. Together, these forces are accelerating revenue growth, driven by external customer demand.”
Alibaba stock rallied 5.1% on Monday after the company said its Qwen AI chatbot exceeded 10 million downloads in its first week. Alibaba is the top cloud-provider in China and is working to establish its Qwen large language models as a global leader. The company said in February that it will spend roughly $53 billion over three years to develop AI infrastructure.
Wu said at an industry conference that by September the company will exceed that total because demand exceeds expectations.
Excitement about AI and expectations for improved consumer spending in China have helped Alibaba stock rally more than 80% this year.
Quick Commerce Investments Hit Profits
Alibaba has also been investing in growing its “quick commerce” local delivery business, where it is competing against fellow China tech giants JD.com (JD) and Meituan. Investment in discounts and other growth initiatives has weighed on earnings for Alibaba since the company launched the business earlier this year.
“Quick commerce continued to scale with significant improvement in unit economics and drove rapid growth in monthly active consumers on the Taobao app,” Wu said in Alibaba’s news release.
Revenue from quick commerce grew 60% year over year while Alibaba’s larger China e-commerce group grew 16%.
But investors are closely watching for when the investment race to win market share will let up. When it reported quarterly results earlier this month, JD said it expects it can reduce investments in its quick delivery business.
Alibaba CFO Toby Xu said on the conference call that the company could start “sizing down” the scale of its quick commerce investments. “Of course, having said that, we will dynamically adjust the pace and size of our investments in line with market competition,” Xu said, according to the FactSet transcript.
Analyst Response
CFRA analyst Angelo Zino reiterated a buy call for Alibaba stock following the report, but he lowered his price target to 196 from a previous 212.
“We were impressed by top-line growth acceleration on a like-for-like basis, driven by Alibaba’s aggressive strategic pivot toward two core pillars: AI and Cloud and consumption (primarily quick commerce),” Zino wrote. “That said, the move is putting greater-than-expected pressure on profits/margins.”
Morningstar’s Tam wrote that Alibaba shares were hit by concerns that the company “guided cloud revenue year-on-year growth will be ‘high,’ instead of ‘accelerating,’ in the coming quarters and that customer management revenue, or CMR, year-on-year growth will decelerate in the December quarter.”
The guidance may be in response to supply constraints and component shortages, Tam said. But she maintained a “fair value estimate” of 258 for Alibaba stock.
“The shares are undervalued, as the market continues to underestimate management’s strong execution capabilities and Alibaba’s cloud business potential,” Tam wrote. “Alibaba delivered on its promise to halve quick commerce unit economics, or UE, losses by October compared with July and August, while maintaining order volume share.”
Alibaba Stock 2025 Rally
On the stock market Friday afternoon, U.S.-listed Alibaba stock were ahead by roughly 1% to around 159. Shares are hovering just below Alibaba’s 21-day moving average after failing to break out ahead of that short-term support level earlier this week.
A strong move above the 50-day line could cross a trendline, offering an early entry in what appears to be an emerging double-bottom base.
Alibaba shares remain well below a 52-week high of 192.67 in early October.
Meanwhile, Alibaba stock has an IBD Composite Rating of 78 out of a best-possible 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one.
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