Alibaba stock slides as Q2 profit misses estimates despite strong AI cloud growth

Alibaba's stock fell by nearly 4% in early U.S. trading after the company reported second-quarter earnings that fell short of analyst expectations. The tech giant reported earnings per share of RMB8.52, significantly below the estimated RMB10.72. Despite a 9% year-over-year revenue increase to RMB268.95 billion, which matched the consensus estimate, the company's AI Cloud and Compute Services revenue surged to RMB48.4 billion, growing at an accelerated 45% year-over-year pace.

This growth was driven by increased adoption of AI-related products, with revenue from these products reaching RMB12.4 billion. Eddie Wu, Alibaba's CEO, stated that the company delivered a strong quarter, highlighting the commercialization of their full-stack AI capabilities. CFO Toby Xu mentioned that Alibaba Cloud's external revenue growth accelerated to 45%, with AI-related product revenue achieving triple-digit growth for the twelfth consecutive quarter.

Cloud segment revenue growth also continued to accelerate, with quality earnings and operating leverage boosting EBITA margin to 12%. However, customer management revenue fell 7% year-over-year to RMB89.12 billion. On a like-for-like basis, excluding the impact from a new business development program, it would have grown 1%. Total e-commerce revenue for Alibaba Group increased by 4% to RMB205.9 billion.

Adjusted EBITA declined by 30% year-over-year to RMB27.3 billion, with the adjusted EBITA margin shrinking to 10%. Citi analysts noted several positives, including CMR coming in slightly above estimates and ecommerce Group EBITA exceeding expectations at RMB 39.7 billion. They also praised strong cloud revenue growth and AI-related revenue contributions.

On the downside, analysts highlighted a sharp rise in capital expenditure alongside a significant decline in free cash flow, which could raise concerns about capital needs and investment returns.