Why Alibaba Stock Fell After Earnings Report Despite Big AI Boost

Alibaba Group (BABA) said its efforts in artificial intelligence are paying off as its cloud growth accelerates. But Alibaba stock took a hit after its fiscal second-quarter earnings report on Tuesday, as analysts scrutinized rising investments from the Chinese tech giant that ate into profits.

Adjusted earnings “beat our estimates due to higher flash trade losses and increased investment in fundamental models and AI applications,” Morningstar analyst Chelsea Tam wrote in a research note on Wednesday. Alibaba stock closed down 2% on Tuesday after the report, reversing initial gains in pre-market trading.

Alibaba reported adjusted earnings of 4.36 yuan per American Depositary Share for the quarter ending September. That’s down 71% from the same period a year earlier and below the 6.03 yuan per ad that analysts polled by FactSet had expected.

Sales increased 5% to 247.8 billion yuan, or $34.9 billion, compared to analyst estimates of 243.8 billion yuan. yThe online company noted that sales growth was 15% when excluding previous revenue from businesses Alibaba sold earlier this year, including a supermarket and department store company.

Alibaba’s cloud business sales increased 34% year-on-year to 39.82 billion yuan, or $5.6 billion. That was ahead of the 27.8% growth Wall Street analysts had expected. Cloud growth has accelerated this year from 26% in the company’s June quarter and 17% in Alibaba’s March quarter.

Alibaba Stock: Artificial Intelligence Strengths

Alibaba’s scale advantages are becoming clear as the AI ​​market grows, Alibaba Group CEO Eddie Wu told analysts during an earnings call. Alibaba is the largest cloud provider in China.

“As AI applications expand, more developers and enterprise customers are choosing vendors with integrated AI technology portfolios,” Wu said, according to a FactSet transcript. “Second, customers are deepening and expanding their use of AI, leading to a significant increase in demand for traditional compute, storage, and other cloud services. Together, these forces are accelerating revenue growth, driven by external customer demand.”

Alibaba stock rose 5.1% on Monday after the company said its Qwen AI chatbot surpassed 10 million downloads in its first week. Alibaba is China’s largest cloud service provider and is building its big Qwen language models as a global leader. The company said in February that it would spend nearly $53 billion over three years to develop artificial intelligence infrastructure.

By September, the company will exceed that total because demand exceeds expectations, Wu said at an industry conference.

Excitement around artificial intelligence and expectations of improved consumer spending in China have helped Alibaba shares rise more than 80% this year.

Fast business investments bring profits

Alibaba is also investing in growing its domestic “express commerce” delivery business, where it competes with other Chinese tech giants. JD.com (dinar) and Meituan. Investing in discounters and other growth initiatives has weighed on Alibaba’s earnings since the company launched its business earlier this year.

“Fast commerce continued to expand with significant improvement in unit economics and drove rapid growth in monthly active consumers on the Taobao app,” Wu said in an Alibaba press release.

Express commerce revenue grew 60% year-on-year, while Alibaba’s larger Chinese e-commerce group grew 16%.

But investors are watching closely when the investment race to win market share will stop. When it reported its quarterly results earlier this month, JD said it expected to be able to reduce investments in its express delivery business.

Alibaba’s chief financial officer, Toby Xu, said on the conference call that the company could begin to “scale back” its agile commerce investments. “Of course, having said that, we will dynamically adjust the pace and scale of our investments in line with market competition,” Xu said, according to a FactSet transcript.

The analyst responded

CFRA analyst Angelo Zino reiterated a buy call on Alibaba shares after the report, but lowered his price target to 196 from 212 previously.

“We were impressed by accelerating overall growth on a like-for-like basis, driven by Alibaba’s strong strategic pivot towards two core pillars: AI, cloud and consumerism (primarily express commerce),” Zeno wrote. “However, this move puts greater than expected pressure on earnings/margins.”

Morningstar’s Tam wrote that Alibaba shares were affected by concerns that the company’s “year-over-year growth in cloud-oriented revenue will be ‘rising’ rather than ‘accelerating’ in the coming quarters and that customer management revenue, or CMR, growth will slow year-over-year in the December quarter.”

Tam said the directive may be a response to supply constraints and ingredient shortages. But it maintained a “fair value estimate” of 258 for Alibaba shares.

“Shares are undervalued as the market continues to underestimate Alibaba’s strong execution capabilities and cloud business capabilities,” Tam wrote. “Alibaba has delivered on its promise to halve its express commerce unit economics, or UE, losses by October compared to July and August, while maintaining order volume share.”

Alibaba stock 2025 rally

On the stock market Friday afternoon, Alibaba’s U.S.-listed shares advanced nearly 1% to around 159. Shares are hovering just below Alibaba’s 21-day moving average after failing to break out before a short-term support level earlier this week.

A strong move above the 50-day line could lead to a trendline crossing, providing an early entry into what appears to be an emerging double bottom base.

Alibaba shares remain well below their 52-week high of 192.67 points in early October.

Meanwhile, Alibaba stock has an IBD Composite Rating of 78 out of a top 99, according to IBD Stock Checkup. The score combines five separate property assessments into one assessment.

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