Alibaba Group Holding Ltd.’s profit plunged more than 75% after the Chinese company ratcheted up quarterly capital spending to almost $10 billion, aiming to safeguard its position in a fiercely competitive global AI arena.
The online retail giant-turned-AI player reported a 9% jump in revenue, in line with estimates and reflecting torrid growth in demand for the computing capacity its cloud division provides. But net income tumbled three-quarters to 10.5 billion yuan ($1.6 billion) and it registered a free-cash outflow of $6.6 billion, reflecting the rising cost of AI projects and computing infrastructure. Alibaba’s US shares fell more than 4% in pre-market trading.
China’s e-commerce leader this year cemented its status as a global artificial intelligence frontrunner after its flagship Qwen offering became the world’s most popular model family. The company in early 2025 pledged to spend more than 380 billion yuan over three years on everything from chips to data centers, becoming one of the country’s biggest AI spenders. That effort to challenge Anthropic PBC and OpenAI is eroding margins, while anemic domestic consumption dogs its mainstay online retail business.
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On Thursday, Chief Executive Officer Eddie Wu stressed that Alibaba’s investments were bearing fruit. The company expects annualized revenue from AI products to near $10 billion this quarter, up from around $7.3 billion in the April to June period. Executives said the company should be able to recoup its overall AI investment within the three-year period.
“Our AI business’s capacity to self-fund and sustain itself is strengthening, giving us greater confidence to keep investing,” Wu told analysts on a conference call. “Looking ahead, AI has become Alibaba’s most certain growth engine. We will stay strategically disciplined and drive long-term growth through our full-stack AI capabilities.”
Last week, Tencent Holdings Ltd. similarly spooked investors. The WeChat-operator more than doubled AI spending, underscoring the mounting cost of trying to catch up or stay ahead in the burgeoning field.
Wu has said his company will prioritize growth over short-term bottom-line considerations. It’s merged most of the AI-related research and product teams under Alibaba Token Hub, a business unit directly led by Wu. It’s also been divesting non-core assets in the past two years, including selling gaming unit Lingxi Games this month. The ultimate aim is to quintuple cloud and AI revenue to $100 billion over five years.
But the growing capex and negative free cash flow “could raise concerns around capital needs and investment returns,” Citigroup analysts wrote.
Alibaba Falls on ‘Underwhelming’ Results, AI Capex: Street Wrap
What Bloomberg Intelligence Says
Alibaba’s weak fiscal 1Q results confirm our view that AI will continue to depress, not enhance, returns at China’s leading AI companies — Tencent, Baidu and Alibaba. Adjusted Ebita in Alibaba’s Cloud Intelligence division rose by just $420 million during the quarter — a poor return on investment — as capital expenditures rose 2.6x sequentially to a whopping $10 billion. Alibaba’s free cash flow widened to an outflow of around $6.6 billion, vs. an outflow of $2.5 billion in the prior quarter, burdened by the heavy cost of AI-related investments. Adjusted Ebita losses at the AI Labs and Apps business more than quadrupled to $2 billion, despite the company’s solid technological achievements. Alibaba’s AI business will generate cash losses for the next three years, in our estimation.
- Robert Lea and Jasmine Lyu, analysts
Chinese AI powerhouses face growing pressure from investors to translate capital expenditure into returns, while still mostly offering models for free or very low fees compared with US peers.
Alibaba seemed to intensify its own monetization efforts earlier this year. But it’s back in a race for users over profit by making its latest flagship model — the Qwen 3.8 Max — open-weight. That marks the first time it’s released the values that help AI systems make decisions for its largest model class.
Alibaba is seeking to boost monetization by targeting paying subscribers with its coding and agentic platforms, hoping to chip away at a burgeoning market dominated by rivals such as Tencent and ByteDance Ltd.
ByteDance’s Doubao, currently China’s most popular AI app, introduced a subscription plan this year. Alibaba also operates the Qwen app, an all-in-one AI assistant handling daily tasks like shopping and payments. It’ll go head-to-head with a new AI agent on Tencent’s WeChat platform in coming quarters.
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