Alibaba Shares Fall 7% as Earnings Miss Profit Estimates; Analysts Bullish on AI Cloud Business

Alibaba Group Holding Ltd. shares fell nearly 7% on Friday as investors digested higher AI spending and profit pressure, despite the consumer discretionary sector rising 0.81% and the S&P 500 gaining 0.43%.

Alibaba is ramping up investment in AI and cloud computing as its next growth engine, but at the cost of near-term margins and cash flow, which are under pressure from increased technology spending and weak consumer demand in China.

In its fiscal 2027 first-quarter update, revenue rose to $39.64 billion, while adjusted earnings per ADS fell 42% to $1.26, missing the $1.85 estimate.

Benchmark analyst Fawne Jiang believes Alibaba is increasingly well-positioned to benefit from accelerating AI cloud demand, margin improvement, and narrowing losses in quick commerce and AI applications.

AI Cloud Growth Drives Upside

Jiang said Alibaba's fiscal 2027 first-quarter results reinforced her view that AI Cloud has entered a structural growth phase. Cloud revenue grew 45% year-over-year, and management expects growth to accelerate further while margins continue to expand.

She sees agentic AI adoption as a key driver, as AI agents consume more tokens and computing resources while also boosting demand for storage, databases, networking, and other cloud services.

Jiang highlighted Alibaba's Model-as-a-Service business, which has surpassed RMB 16 billion in annual recurring revenue. Management expects AI-related revenue run-rate could approach $10 billion as early as next quarter.

She believes the combination of Alibaba's Qwen models, cloud infrastructure, and self-developed T-Head chips creates cost and competitive advantages. Management now sees a clearer path to $100 billion in external cloud revenue by 2030, with margins around 20%.

Quick Commerce Losses Narrowing Faster Than Expected

Jiang is also positive on improving economics in Alibaba's e-commerce business. E-commerce revenue grew 4% year-over-year, while same-store customer management revenue rose approximately 1%.

Quick commerce revenue grew 45%, with losses narrowing faster than Jiang expected. Management expects non-food transaction volume to exceed food in the next fiscal year and believes quick commerce could eventually contribute roughly 30% of platform GMV, while achieving profitability in fiscal 2029.

AI Spending Remains Disciplined

Alibaba's capital expenditure was RMB 6.77 billion in the quarter. Jiang noted management remains on track with its RMB 380 billion three-year AI infrastructure plan, with approximately RMB 190 billion deployed as of June.

She noted that current AI infrastructure investments reach breakeven in roughly three years, with potentially shorter payback periods as margins improve and Alibaba deploys more T-Head chips.

Jiang Raises Earnings Estimates

Jiang expects stronger cloud results, faster quick commerce loss narrowing, and improved AI Labs economics to boost Alibaba's earnings.

She raised her fiscal 2027 adjusted EBITDA estimate to RMB 17.1 billion and fiscal 2028 to RMB 21.2 billion, both representing double-digit growth.

Jiang maintained a Buy rating and a $220 price target on Thursday, calling Alibaba the best-positioned AI investment in the China internet sector.

Top ETF Exposure

Global X Artificial Intelligence & Technology ETF: 3.44% weight

Baron Emerging Markets Select ETF: 2.22% weight

Nomura Focused Emerging Markets Equity ETF: 2.46% weight

Significance: Given BABA's significant weight in these funds, any notable inflows or outflows into these ETFs could trigger automatic buying or selling of the stock.

Price Action

BABA stock price action: Alibaba shares fell 6.82% on Friday to $121.63.