TLDRs
- Alibaba shares recovered as AI Cloud adjusted EBITA surged 133% during the quarter.
- Cloud revenue jumped 45%, highlighting accelerating demand for Alibaba’s artificial intelligence infrastructure.
- AI Labs recorded a RMB13.86 billion loss as model development costs continued rising.
- Alibaba increased quarterly capital expenditure 75%, intensifying pressure on free cash flow.
- Analysts remain bullish, with listed BABA price targets reaching as high as $195.
Alibaba (NYSE: BABA) shares recovered from an early decline following the company’s June-quarter results as investors focused on accelerating cloud growth and improving artificial intelligence infrastructure profitability despite mounting losses elsewhere in its AI business.
The stock ended regular U.S. trading about 1.3% higher on August 20, reversing an initial post-earnings decline. Alibaba shares were around $130.20 in after-hours trading, leaving the stock roughly 5% above its August 14 closing level.
The recovery came as investors weighed two competing signals from Alibaba’s latest results. On one side, the company’s AI Cloud and Compute business delivered a sharp improvement in profitability, with adjusted EBITA climbing 133% from the previous period to RMB5.63 billion. On the other, the company’s AI Labs and Applications division continued to consume significant amounts of capital, recording a RMB13.86 billion adjusted EBITA loss.
That loss was approximately 2.46 times the profit generated by AI Cloud, underscoring the enormous costs Alibaba is absorbing as it develops artificial intelligence models, applications and supporting infrastructure.
Alibaba Group Holding Limited, BABA
Cloud Growth Drives Profitability
Alibaba’s cloud business remained the strongest part of the company’s latest earnings report. Revenue from AI Cloud and Compute increased 45% year over year to RMB48.44 billion, while adjusted EBITA more than doubled to RMB5.63 billion.
The unit’s adjusted EBITA margin also improved to approximately 12%, compared with about 7% previously. That expansion suggests Alibaba is beginning to extract stronger economics from the infrastructure supporting its growing AI workloads.
AI-driven product revenue reached RMB12.38 billion during the quarter, equivalent to roughly 26% of AI Cloud sales. The company said this revenue category maintained triple-digit growth for the 12th consecutive quarter, providing another indication that demand for AI-related services is expanding rapidly.
Alibaba Chief Financial Officer Toby Xu said the cloud performance supports “disciplined and sustained investment in AI,” signaling that management remains committed to spending heavily on the technology even as profitability across the wider group comes under pressure.
AI Labs Losses Remain Heavy
The other side of Alibaba’s AI strategy remains considerably more expensive.
AI Labs and Applications generated RMB3.34 billion in revenue, representing 16% year-over-year growth. However, its adjusted EBITA loss reached RMB13.86 billion, with losses increasing 330%.
The widening deficit reflects Alibaba’s continued spending on frontier models, Qwen inference and consumer-facing AI applications. While the company is seeing stronger demand, management has acknowledged that monetization has not yet caught up with the cost of developing and operating these technologies.
Chief Executive Eddie Wu expects the economics to improve as Alibaba increasingly uses its proprietary T-Head chips rather than relying exclusively on commercially sourced processors for its data centers.
That transition could become important because hardware expenses remain a major component of the company’s AI investment. If Alibaba can reduce infrastructure costs while increasing utilization, the gap between AI Cloud profits and AI Labs losses could gradually narrow.
AI Spending Pressures Cash Flow
Alibaba’s improving cloud profitability comes alongside a substantial increase in capital spending.
The company reported quarterly capital expenditures of RMB67.68 billion, representing a 75% increase from the same period a year earlier. Alibaba has committed RMB380 billion to AI and cloud infrastructure over three years, and approximately RMB190 billion had already been spent by June.
The spending surge contributed to a sharp deterioration in free cash flow. Alibaba reported a free cash flow outflow of RMB44.67 billion, compared with an RMB18.82 billion outflow during the corresponding period last year.
The broader financial picture was therefore considerably weaker than the cloud numbers alone suggest. Revenue increased 9% to RMB268.95 billion, but operating income plunged 57% to RMB15.16 billion. Net income dropped 75% to RMB10.44 billion from RMB42.38 billion a year earlier.
For investors, the central question is whether Alibaba’s current spending cycle can eventually translate into substantially higher AI revenue and sustainable cash generation.
Management expects AI-related capital investments to reach break-even within three years, making future cloud margins, AI demand and infrastructure utilization key indicators for the stock.
Analysts Maintain Bullish Outlook
Despite the earnings-related concerns, several analysts continue to see significant upside in BABA shares.
Bank of America Securities analyst Joyce Ju maintained a Buy rating with a $172 price target. Morgan Stanley’s Gary Yu has an Overweight rating and a $180 target, while Bernstein’s Robin Zhu also has a $180 target.
Citi analyst Alicia Yap has a $192 target, while Barclays analyst Jiong Shao has set the highest listed target at $195. The supplied analyst data also puts the consensus target around $190.01.
Those targets indicate that analysts remain confident in Alibaba’s longer-term AI and cloud opportunity, although the company must demonstrate that its enormous investments can eventually produce stronger returns.
The stock’s latest rebound suggests investors were willing to look beyond the immediate earnings decline and focus on the improving economics of Alibaba’s cloud infrastructure. However, the company still faces risks from weaker Chinese economic activity, rising chip costs and restrictions affecting access to advanced technology.
For BABA shareholders, the next phase of Alibaba’s AI strategy may depend less on simply increasing investment and more on proving that AI Cloud’s rapidly expanding profits can eventually offset the heavy losses generated by AI Labs and Applications.
Get 3 Free Stock Ebooks
Discover top-performing stocks in AI, Crypto, and Technology with expert analysis.
- Top 10 AI Stocks - Leading AI companies
- Top 10 Crypto Stocks - Blockchain leaders
- Top 10 Tech Stocks - Tech giants
