Alibaba's adjusted profit collapsed as the company doubled down on AI

Alibaba reported a 9% increase in quarterly revenue on Thursday, driven by strong demand for artificial intelligence (AI) in its cloud business, but fell short of adjusted profit expectations due to significant capital expenditure. As businesses adopt AI, the demand for cloud computing resources to train and operate AI systems has surged, benefiting China's leading technology companies.

Alibaba, being the largest cloud services provider in the country, has ramped up investment in AI infrastructure, proprietary models, and applications, positioning AI as a crucial growth driver for its cloud and consumer businesses.

The company's AI cloud and compute services revenue grew by 45% to 48.44 billion yuan ($7.21 billion) in the quarter. However, Alibaba's adjusted earnings per American Depositary Share (ADSP) of 8.52 yuan missed estimates of 10.53 yuan, causing its U.S.-listed shares to drop 2.6% in premarket trading. Alibaba CEO Eddie Wu stated, "We delivered a strong quarter, driven by the improving commercialization of our full stack AI capabilities."

Alibaba's capital expenditure rose by 75% to 67.68 billion yuan in the quarter ending June 30, as the company continued to invest in AI infrastructure. The first-quarter revenue was 268.95 billion yuan, slightly higher than the average analyst estimate of 268.88 billion yuan, according to data from LSEG. Alibaba's net income for the quarter plunged 75%.

The Chinese AI race is intensifying, with Alibaba competing against other Chinese tech giants and startups to develop more powerful open-weight frontier AI models at a lower cost compared to U.S. offerings like Anthropic's Claude. As competition heats up, firms are focusing on enhancing agentic and coding capabilities to capture a larger share of China's lucrative domestic enterprise market.

Alibaba is also investing in other Chinese frontier AI startups, such as Moonshot, and provides them with cloud computing infrastructure. Earlier this year, Alibaba separated its AI businesses from its cloud computing arm and appointed Eddie Wu to lead the "Alibaba Token Hub" group, as the company strives to make its AI segment profitable.

Alibaba's fintech affiliate, Ant Group, reported a 1% year-on-year increase in quarterly profit, partly due to its efforts to pivot towards agentic AI commerce, AI digital health applications, and embodied AI models.