Alibaba’s AI cloud revenue set to surge over 50% as investment blitz pays off: analysts

Alibaba Group Holding is projected to experience a 50% surge in revenue for its cloud and artificial intelligence unit in the September quarter, thanks to strong returns on its aggressive investments in AI, according to analysts. The AI Cloud and Compute Services unit is expected to outpace growth from the prior quarter, which reported a 45% increase.

The segment is also anticipated to see an improvement in profit margins, with Jefferies projecting it to reach 12.3% and Longbridge Securities forecasting about 15%, up from 12% in the June quarter. This comes after the segment's record-breaking performance in the June quarter, where it generated 48.4 billion yuan (US$7.2 billion) in revenue, marking the fastest growth in 22 quarters.

Alibaba's AI Lab and Applications segment is also expected to grow 20% year on year, with projected losses narrowing to between 10 billion and 11 billion yuan for the period. Overall, Alibaba's group performance is expected to improve, with Jefferies estimating a 9.6% year-on-year revenue growth for the quarter, slightly better than the 9% growth in the previous quarter.

Despite heavy capital expenditure, Alibaba's cloud business profits are expected to offset the losses from the AI Lab and Applications segment by the end of December, as per Jefferies analysts Thomas Chong and Zoe Zong. The forecasts follow Alibaba's announcement at its Apsara Conference in September, where the company unveiled new AI technologies and outlined ambitions to scale its global data centre capacity to more than 20 gigawatts by 2032.

Alibaba issued HK$80 billion (US$10.2 billion) in new shares in August to fund its AI initiatives, marking its first share placement since its listing in Hong Kong in 2019. Alibaba's chairman, Joe Tsai, emphasized the company's bet on full-stack AI capabilities during the Wave tech event in Italy, stating that AI would be integrated into all aspects of the business within the next five years.

Meanwhile, Alibaba's core e-commerce unit continues to face competition, with Jefferies expecting quarter-on-quarter losses for its quick-commerce unit to narrow to about 9.8 billion yuan. Alibaba shares fell 1% to HK$104.30 on Wednesday, as Chinese tech stocks retreated in Hong Kong. The company is expected to release its September-quarter earnings in November.