Alibaba Says AI Spending Can Pay Off Within Three Years

Alibaba Group Holding Ltd. is ramping up investment in artificial intelligence and cloud computing to drive its next phase of growth. However, hefty technology spending, weak e-commerce performance, and sluggish consumer demand in China are pressuring profits and cash flow.

Revenue Grows but AI Spending Weighs on Profit

Alibaba reported first-quarter fiscal 2027 revenue of $39.64 billion, up 9% year over year, beating analyst expectations of $38.63 billion.

However, adjusted earnings per American depositary share fell 42% to $1.26, missing the expected $1.85. Adjusted net income dropped 38% to $3.05 billion, and adjusted EBITA declined 30% to $4.03 billion. Net income plunged 75% to $1.54 billion.

Alibaba attributed most of the profit pressure to technology investments. Stronger cloud business performance and efficiency improvements in other operations partially offset this impact.

Cloud Computing and AI Drive Growth

AI cloud computing and computing services revenue jumped 45% to $7.14 billion, as customers increased usage of public cloud and AI products. AI-related product revenue reached $1.82 billion, marking the 12th consecutive quarter of triple-digit year-over-year growth.

Chief Executive Officer Wu Hong placed AI and cloud computing at the center of Alibaba's strategy. He said the company will prioritize AI growth over near-term profit and invest beyond its previously announced three-year spending plan of 380 billion yuan. Alibaba aims to grow cloud computing and AI revenue to $100 billion within five years.

Alibaba has also restructured around this strategy. It merged Cloud Intelligence with chip designer T-Head and integrated key AI research and products. Meanwhile, the company divested non-core assets, including Lingxi Interactive Entertainment.

Weak E-Commerce Contrasts with AI Boom

Alibaba's China e-commerce group revenue fell 8% to $16.35 billion. International e-commerce revenue slipped 1% to $4.09 billion, as weak Chinese consumption pressured its traditional retail operations.

The company is also working to connect AI and commerce through products such as Tongyi Shopping Assistant and the Tongyi app. Alibaba integrated its China e-commerce, international commerce, and Freshippo businesses to generate greater operational synergies across shopping platforms.

Analysts Focus on AI Spending Returns

Bloomberg Intelligence analysts Catherine Lim and Jason Zhu believe Alibaba's AI advantages could become easier to quantify in 2027 if returns per yuan of investment continue to improve. They also expect easing competition in delivery services to support operating cash flow.

However, analysts warned that record capital expenditures on proprietary chips, AI applications, and other technologies could absorb most of the cash flow growth.

Alibaba reported operating cash flow growth of 11% to $3.38 billion. However, cloud infrastructure investment led to a free cash flow usage of $6.58 billion. The company held $69.93 billion in cash and other liquid investments at the end of June.

On Thursday's earnings call, Alibaba executives said that based on current average gross margins, the company could achieve breakeven on AI-related capital expenditures within about three years.

The executives also said Alibaba Cloud is undergoing a broad upgrade toward an "agentic cloud" model. The company expects AI and cloud revenue growth to further accelerate in the next quarter.

Alibaba also expects productivity agents to become another driver of annual recurring revenue growth.

BABA stock performance: In Thursday pre-market trading, Alibaba shares fell 3.24% to $124.73.