Alibaba Group (BABA +1.26%), which shot to fame and prominence as China’s everything-but-the-kitchen-sink e-commerce giant, is in the midst of a long transformation. It’s reshaping itself as a leading artificial intelligence (AI) and cloud services provider in the massive Asian country, and, in my view, that’s what pushed its U.S.-listed stock up on Thursday.
This, despite a second-quarter earnings report published that morning, in which it missed badly on the bottom line. Here’s what happened.
Image source: Alibaba.
A high-cost quarter
Before market open, Alibaba revealed that its revenue for the period was just under 269 billion yuan ($40 billion), representing a gain of 9% year over year. Net income not under generally accepted accounting principles (non-GAAP, or adjusted) veered hard in the other direction, though, tumbling by 38% to 20.7 billion yuan ($3.1 billion). That shakes out to 8.52 yuan ($1.27) per each of the company’s American Depositary Shares (ADSes).
Alibaba’s revenue more or less met the consensus analyst estimate. That sure wasn’t the case for profitability, as pundits tracking the Asian tech giant were modeling 10.72 yuan ($1.59) per ADS, on average.
The company’s bottom line was affected by several large items. Chief among these was a ramp-up in capital expenditures; these leaped by 75% to almost 67.7 billion yuan ($10.1 billion). In what’s become a global trend, Alibaba has lately invested heavily in AI infrastructure to both support its legacy business and bolster its own AI and cloud offerings.
Profitability also took a hit from an accounting charge Alibaba booked in the quarter for a record fine imposed on it last month. The European Commission — the executive body of the 27-member European Union (EU) — slapped the company’s international e-commerce business AliExpress with a 550 million euro ($642 million) sanction over violations of the EU’s Digital Services Act, which prohibits the dissemination of harmful and illegal online content. This third and largest fine handed down under the still relatively new law occurred in late July.
Such costs weren’t beneficial for the company’s free cash flow, which turned negative by almost 44.7 billion yuan ($6.6 billion). In the second quarter of 2025, it was positive at 18.8 billion yuan ($2.8 billion).
Today’s Change
(1.26%) $1.63
Current Price
$130.53
Key Data Points
Market Cap
Day’s Range
$121.88 – $130.62
52wk Range
$91.99 – $192.67
Volume
28.1M
Avg Vol
11.7M
Gross Margin
39.26%
Dividend Yield
0.81%
The burden of past glory
Another factor is the plain fact that Alibaba’s legacy domestic e-commerce business looks mature these days. Yes, the company is still very powerful in the sector; however, a sluggish Chinese economy and intense competition are weighing on it. The company’s e-commerce operations in the country saw a 8% revenue decline during the quarter, to just under 111 billion yuan ($16.5 billion).
That’s probably why management took pains to talk up the performance of the rapidly expanding AI and cloud business. Revenue from these hot areas of the tech world zoomed 45% higher, reminiscent of the days when the company regularly posted such growth numbers. AI and cloud still isn’t close to topping e-commerce as the No. 1 contributor to the overall Alibaba top line; it came in at 48.4 billion yuan ($7.2 billion). But if it can exceed, maintain, or even come close to that growth pace in future quarters, it has a good shot at doing so.
I feel that’s what tipped sentiment on Alibaba into positive territory on Thursday. Yet the slight bump in ADS price on Thursday indicates optimism of the cautious variety. I think this has to do with Alibaba still being considered very much an online retailer, with much to prove in its embrace of AI and cloud services.
To me, though, 45% growth and a revenue line approaching 50 billion yuan ($7.4 billion) for a single quarter prove this is no young upstart experiencing a one-time pop. Alibaba is a serious player in those technologies and is rapidly becoming a powerhouse in both. Meanwhile, given its prominence and presence in the e-commerce field, I believe that business will slump a bit in the worst-case scenario, but more likely flat-line or eke out a little growth going forward.
The combination of a solid base and a hotly growing, sustainable business will make Alibaba’s equity a more compelling buy than the post-earnings reaction suggests, in my opinion.
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