Alibaba signals faster AI payoff, margin gains halfway through US$56 billion capex plan

Alibaba Group Holding is projected to experience accelerated cloud growth, rising operating margins, and swifter returns on its AI investments, according to analysts. The Chinese tech giant has completed half of its substantial 380 billion yuan (US$56 billion) AI infrastructure spending plan. "Our view is that the cloud growth has not yet peaked," stated Nomura analysts in a research note.

This growth has coincided with a notable 45% revenue surge in Alibaba's cloud and AI sectors during the three months ending June, marking its fastest expansion in 22 quarters. Analysts are encouraged by the accelerating growth coupled with meaningful margin expansion, rather than a decline in profitability. The adjusted Ebita margin of Alibaba's AI cloud unit reached 11.6%, a significant increase from around 7% a year ago.

Jefferies anticipates revenue growth for Alibaba's Cloud and Compute Services, the new reporting segment covering its cloud business and T-Head chip arm, to surpass 50% year-on-year in the September quarter, with further momentum expected through March 2027. Alibaba's CEO, Eddie Wu Yongming, announced that the company's AI computing investments would break even within three years, potentially within two years due to rising gross margins.

The company had already spent 190 billion yuan in capex by the end of June, as part of its plan to invest 380 billion yuan in digital infrastructure over the next three years. Goldman Sachs analysts have revised their capex estimates for 2027 and 2028, projecting 210 billion yuan and 240 billion yuan, respectively, driven by robust AI demand and favorable returns on invested capital.

Despite Alibaba's aggressive spending, shares fell 2.5% to close at HK$123 in Hong Kong on Friday. The company's quarterly outlay of 67.7 billion yuan surpassed the 52.8 billion yuan spent by domestic peer Tencent Holdings, highlighting a scale divergence from US hyperscalers.