Profits fell sharply
The net profit of the Chinese Alibaba Group for the reporting period decreased by more than 75% — up to 10.5 billion yuan, or about $1.6 billion.
The main reasons were the large-scale increase in costs for the development of artificial intelligence and weaker consumer demand in China's domestic market.
At the same time, the situation with revenue looks much better: Alibaba revenue up 9%, which roughly corresponds to analysts' expectations.
Thus, the company is now effectively trading some of its current profits for the opportunity to gain a faster position in the AI market.
Where Alibaba spends billions
One of the largest areas of expenditure has become the infrastructure necessary for the operation of modern AI models.
Alibaba increases spending on:
- purchase of high-performance chips;
- construction and expansion of data centers;
- cloud computing;
- development of AI models;
- creation of autonomous AI agents;
- software platforms for developers.
Due to these investments, the company recorded outflow of free cash flow over $6.6 billion.
For Alibaba, this means a significant deterioration in short-term financial performance, but management sees the cost as an investment in the future business.
The company is raising its stake in the cloud business
Under the leadership of CEO Eddie Wu, Alibaba did Cloud and AI are key areas of long-term strategy.
The company plans to exceed the previously announced three-year investment plan in 380 billion yuan.
The goal is to roughly quintuple revenues from cloud services and AI over the next five years, bringing them to around $100 billion.
This shows the scale of Alibaba's bet on artificial intelligence: the company is ready to invest huge sums of money even before this direction starts to bring the appropriate level of profit.
Alibaba is reshaping business for AI
The company is also reviewing the structure of its own business to free up resources for priority technological areas.
Most of the teams working on AI products have been merged into a new division Alibaba Token Hub.
In parallel, Alibaba sells non-core assets. In particular, the company agreed to sell its gaming business Lingxi Games for approximately $1.5 billion.
The company can direct the received funds and freed resources to the development of AI and cloud infrastructure.
Qwen becomes Alibaba's top bet
An important part of Alibaba's strategy is its own line of AI models Qwen.
The company is actively developing the Qwen ecosystem and opens the scales of its models to developers. This allows Alibaba to compete not only in the Chinese market, but also globally.
As a result, the company is trying to create a broad ecosystem around Qwen — from models and software tools to AI agents and cloud services.
The main problem is monetization
Large-scale investment alone does not guarantee Alibaba high profitability.
The company needs to turn huge costs into real income from AI. This is difficult because the Chinese market remains extremely competitive and many AI services have long been offered to users for free.
Alibaba is trying to increase the number of paid users of its services for programmers, AI agents and cloud platforms.
At the same time, the company competes with ByteDance, Tencent and other Chinese tech giants.
Alibaba is betting on the long game
A 75% drop in profits looks negative for shareholders in the short term. However, the company itself demonstrates a different logic: better to spend more now to keep up with the competition in the key technology race.
It is particularly telling that revenue continued to grow by 9%, while profit and cash flow took the brunt of the blow.
After the report was released, Alibaba's American depositary receipts lost about 4% at pre-market auctions, which indicates the concern of investors about the scale of expenses.
What this means for Alibaba
The company is actually moving away from a model where e-commerce was the main source of business, to a technology model in which cloud computing and AI are set to become new growth engines.
If demand for AI services and computing power continues to grow, current costs can turn into a significant source of future revenue. If monetization turns out to be weak, Alibaba risks spending tens of billions of dollars for years without a corresponding return.
In fact, the company is now making one of the biggest bets in its history: giving up some of its current profits to fight for the future AI market.
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