Chinese e-commerce leader Alibaba is facing investor skepticism after reporting sharply lower profits, despite achieving solid revenue growth. The company’s aggressive push into artificial intelligence infrastructure is driving substantial spending increases, raising questions about the timeline for returns on these massive investments.
Financial Performance Reveals Contradictory Trends
For the second quarter of fiscal year 2026, Alibaba presented a mixed financial picture that left market participants concerned. Revenue advanced 5% to 247.8 billion yuan, surpassing market expectations. The cloud computing division demonstrated particularly strong performance, with sales surging 34% to 39.8 billion yuan as demand for AI solutions accelerated dramatically.
However, the bottom line told a different story. Net income plummeted by 53% to just 20.61 billion yuan. On an adjusted basis, earnings per share fell significantly short of analyst projections. More alarming to investors who have long valued the company’s financial strength was the free cash flow situation, which turned negative for the first time at -21.8 billion yuan.
Soaring Expenditures in Competitive Markets
The profit contraction stems directly from Alibaba’s substantial commitments to artificial intelligence development. Investment expenditures skyrocketed by 80% during the quarter. CEO Eddie Wu indicated that even the previously announced three-year allocation of 380 billion yuan might prove insufficient to meet customer demand for AI services.
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The company’s proprietary AI chatbot Qwen achieved remarkable adoption, attracting over 10 million downloads within a single week. This success, however, comes with substantial infrastructure expenses that are weighing heavily on profitability.
Simultaneously, Alibaba confronts intense competition in its core domestic e-commerce sector. Marketing and sales expenses more than doubled as the company battles rivals JD.com and Meituan for market dominance. This competitive pressure contributed to a 76% collapse in adjusted EBITA for Alibaba’s China commerce division.
Market Reaction and Investor Dilemma
Equity markets responded negatively to the earnings report. Alibaba shares declined 2.8% to HK$153.40 in Hong Kong trading, following a 2.3% drop in U.S. markets. Investors now face a challenging assessment: while Alibaba’s long-term positioning as an AI and cloud computing leader appears promising, the near-term outlook suggests continued margin compression and potential further quarters of negative cash flow.
The central question for stakeholders is whether the company’s massive AI investments will ultimately generate sufficient returns to justify the current financial pain, or if Alibaba is engaged in a costly battle against domestic competitors that could erode shareholder value for the foreseeable future.
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