Alibaba Group Holding Limited (NYSE: BABA) saw its U.S.-listed shares climb after the company reported a robust 38% jump in cloud revenue for the March quarter, driven by surging demand for artificial intelligence services. The Cloud Intelligence Group generated 41.63 billion yuan in revenue, with AI-related products accounting for 30% of external cloud revenue.
Despite the cloud strength, the company's overall operating profit swung to a loss of 848 million yuan, compared with a profit of 28.47 billion yuan a year earlier. Total revenue for the quarter reached 243.38 billion yuan, up 3% year over year. Non-GAAP net income plummeted to 86 million yuan from 29.85 billion yuan in the prior-year period, reflecting heavy spending on cloud infrastructure and quick commerce.
CEO Eddie Wu emphasized that the payoff from AI and cloud investments is becoming increasingly clear, stating that these investments are beginning to pay off commercially. However, he noted that growth and market share remain the primary focus, with margins considered secondary for now.
Alibaba now expects to exceed its previously announced 380 billion yuan AI investment plan, though the company has not specified a new target. CFO Toby Xu reaffirmed the strategy to continue investing in AI and cloud to sharpen competitive advantages.
AI-related product revenue reached 8.97 billion yuan in the quarter, marking the eleventh consecutive triple-digit year-on-year increase. The Qwen AI model is now integrated into Taobao and Tmall, offering shoppers a chat-driven browsing experience. On prediction markets, Alibaba's Qwen model was seen as the leading Chinese AI model, with a 65% probability on Polymarket, ahead of Baidu's 22%.
However, the company's China e-commerce segment showed mixed results. Revenue rose 6% to 122.22 billion yuan, driven by a 57% surge in quick commerce to 19.99 billion yuan, but adjusted EBITA for the group dropped 40% due to higher costs for customer acquisition and logistics.
Free cash flow turned negative at 17.3 billion yuan for the quarter, reversing from a positive 3.74 billion yuan a year earlier, as Alibaba increased spending on quick commerce, user acquisition for Qwen, and cloud infrastructure. Despite this, the board approved an annual dividend of $1.05 per American depositary share, totaling about $2.5 billion.
Analysts remain cautiously optimistic. Jacob Cooke of WPIC Marketing + Technologies expects AI-driven expansion to accelerate, while Morningstar's Chelsey Tam noted that the AI investment phase is far from over, with companies likely moving from user acquisition to monetization. However, Reuters Breakingviews pointed out that a significant portion of AI expenses is buried in Alibaba's "All Others" segment, where adjusted EBITA losses have exceeded $3 billion, making it difficult to assess true AI returns.
As Alibaba prioritizes AI scale over short-term profits, investors will be watching cloud margins closely. The key question is whether Qwen can drive more commerce volume back into Alibaba's ecosystem before costs escalate further.
