Alibaba Group had mixed results for the company for the last quarter of the past few quarters with revenue slightly above expectations and earnings were slightly below estimates but earnings were hit by the company’s investment in artificial intelligence and the company’s spending on AI; the company is still spending heavily on AI and its earnings are not yet good enough as well as revenues were lower than expected as the tech giant continues to expand and is still investing in artificial intelligence.
Alibaba reported revenue of 268.95 billion yuan, or $40.02 billion, in the quarter ending June 30, as compared with analysts’ average estimate of 268.88 billion yuan, according to LSEG data. Revenue did so slightly better than expected.
The revenue growth is about 9% year on year, showing the continued growth of Alibaba's businesses. Profitability was much weaker, with net profit falling 76% to 10.54 billion yuan or $1.57 billion.
The headline earnings numbers circulating in the market show EPS of $1.27 against expectations of $1.69, which is a big miss on the earnings side. The revenue beat, however, was still small, with reported revenue of around $39.96 billion in some market data and that is expected to be $39.9 billion.
One of the biggest drivers of Alibaba’s gains in recent years has been its push into AI and cloud computing as well. Alibaba Cloud’s AI and computing-related business has been growing rapidly as companies are desperate to build artificial intelligence/computing infrastructure to train and run AI applications in AI and cloud-related domains.
Alibaba's cloud external revenue increased 45% year-over-year to 48.44 billion yuan during the quarter. AI-related product revenue also continued to grow at triple-digit rates for the 12th consecutive quarter, CEO Eddie Wu said.
The company is spending big on that growth. Alibaba’s capital expenditure rose 75% to 67.68 billion yuan during the quarter as it poured money into AI infrastructure, computing capacity and related technologies.
That aggressive spending is now an essential part of the Alibaba investment story. The additional investment will hurt in the short run but the company is betting that strong demand for AI services will bring in longer-term growth.
Alibaba is also continuing to build up its AI model ecosystem. The company is developing its Qwen family of AI models as well as AI capabilities in its cloud and consumer businesses. Management at the company has also begun to take artificial intelligence as a major growth engine for the future.
Alibaba’s core e-commerce operations also benefited from the extended 618 shopping festival, one of China’s biggest annual online shopping events. The promotional period encouraged consumer activity and contributed to the company’s overall revenue growth.
The latest earnings report thus gives investors two different signals. Alibaba is on the rise, on one hand, in cloud and AI related businesses. But it’s losing money as it is increasing spending to grow to be able to compete with China’s rapidly growing AI market.
For companies looking at BABA, the key question is whether Alibaba will eventually be able to convert its rapid AI and cloud expansion into sustainable earnings growth. Demand for AI infrastructure is a positive sign, but the huge investment required to achieve that is putting pressure on profits.
Alibaba’s latest results come at a critical time of the year for China's technology sector, when so many companies are competing with each other to create AI models, compute infrastructure and commercial applications for AI models and computing solutions.
The company is very clearly choosing to focus on AI growth and long-term positioning in the face of near-term profit growth. The extent to which that strategy will ultimately work will determine how quickly AI-related revenue scales with the cost of building the necessary infrastructure.
Alibaba has now delivered a revenue beat but a missed earnings beat and investors have lots to take in as they assess the company’s future growth.
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