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

Alibaba Group Holding is poised for a surge in cloud growth and improved operating margins as the company reaches the midway point of its 380 billion yuan (US$56 billion) AI infrastructure investment plan. Analysts highlight that Alibaba's cloud segment has not yet reached its peak and that the company's AI cloud unit's adjusted EBITA margin has expanded to 11.6%, up from about 7% a year ago.

The company's Cloud and Compute Services, a new reporting segment covering its cloud business and T-Head chip arm, are expected to experience revenue growth beyond 50% year-over-year in the September quarter, with momentum continuing into the next two quarters through March 2027.

During an earnings call, Alibaba's CEO Eddie Wu Yongming revealed that the company's AI computing investments will break even within three years, with the potential for a two-year payback due to rising gross margins. Wu disclosed that Alibaba has already spent 190 billion yuan in capex by the end of June, marking 50% of the company's three-year AI infrastructure spend plan.

Goldman Sachs analysts have raised their capex estimates for the fiscal years 2027 and 2028 to 210 billion yuan and 240 billion yuan, respectively, fueled by high demand for AI and favorable return on invested capital (ROIC).

Despite the aggressive spending plan, Alibaba faces the challenge of mounting cash outflows. Free cash outflow in the June quarter doubled to 44.7 billion yuan year-on-year due to increased investment in cloud infrastructure. However, analysts believe that heightened demand for compute power, coupled with the deployment of proprietary AI chips, will offset these short-term cash flow pressures.

Alibaba's T-Head chip arm, T-Head, has shipped over 500,000 units of its previous-generation chips and is now commercializing its latest Zhenwu M890 chips in supernode form, designed to function as a single supercomputer when hundreds or thousands of chips are combined. The company's long-term revenue growth and margin expansion prospects are expected to be exceptionally strong, as the cloud unit remains highly confident in achieving a US$100 billion external revenue stream by 2030.