Alibaba’s latest quarter presented investors with a tradeoff: accept a near-term earnings decline in exchange for clearer evidence that its artificial intelligence cloud business is gaining commercial traction.
The market appeared willing to accept that bargain. Alibaba’s shares rose across exchanges after the company said it expects to exceed its earlier RMB 380 billion (USD 55.8 billion) AI investment plan, even as quarterly revenue missed estimates and adjusted profit fell sharply.
The reason was its cloud business. Alibaba’s Cloud Intelligence Group revenue rose 38% year-on-year to RMB 41.6 billion (USD 6.1 billion) in the March quarter, with external customer revenue up 40%. AI-related product revenue reached RMB 9 billion (USD 1.3 billion), marking the 11th consecutive quarter of triple-digit growth and accounting for 30% of external cloud revenue.
During its earnings call, Alibaba management said AI is no longer an experimental line item. Group CEO Eddie Wu said the company’s AI business has “moved beyond the initial investment phase and progressed commercialization at scale.” He added that AI-related product revenue should exceed 50% of external cloud revenue in about a year, becoming the cloud unit’s main growth driver.
That is the strongest part of the story. Alibaba is showing AI monetization not only through infrastructure demand, but also through model and application services. Management expects annualized recurring revenue from model and application services, including Model Studio, to surpass RMB 10 billion (USD 1.5 billion) in the June quarter and RMB 30 billion (USD 4.4 billion) by year’s end.
The company is also trying to connect AI more tightly to its consumer ecosystem. Alibaba has integrated Qwen with Taobao, giving the AI app access to the e-commerce platform’s products and enabling shopping-related tasks such as product comparison, virtual try-ons, price tracking, logistics updates, and after-sales services.
But the cost of that shift is now visible across the financial statements.
Alibaba swung to an operating loss of RMB 848 million (USD 124.6 million) from operating income of RMB 28.5 billion (USD 4.2 billion) a year earlier. Adjusted EBITA (earnings before interest, taxes, and amortization) fell 84% to RMB 5.1 billion (USD 749.4 million), while non-GAAP net income was nearly erased, dropping to RMB 86 million (USD 12.6 million) from RMB 29.8 billion (USD 4.4 billion). Free cash flow was an outflow of RMB 17.3 billion (USD 2.5 billion), compared with an inflow of RMB 3.7 billion (USD 543.7 million) a year earlier.
The company attributed the free cash flow decline to quick commerce investment, Qwen user acquisition, and higher cloud infrastructure spending. Sales and marketing expenses rose to RMB 53.4 billion (USD 7.8 billion), or 21.9% of revenue, from RMB 36.2 billion (USD 5.3 billion), or 15.3% of revenue, a year earlier, mainly because of quick commerce and Qwen user acquisition.
Wu was direct about the hierarchy of priorities. Alibaba’s objective, he said, is to drive token consumption, grow faster than the market, and strengthen its cloud leadership. “Those are the primary objectives, and margin is still secondary,” he said.
That explains the quarter better than the headline profit figures do. Rather than claim that AI has repaired group earnings, Alibaba appears to be arguing that cloud demand, AI pricing, and proprietary infrastructure will make today’s spending worthwhile.
Wu’s argument is not unreasonable. He said customers have accepted higher per-token prices as AI shifts from chatbots to more complex agentic workloads, while demand still exceeds supply. He also said model-as-a-service carries higher gross margins than infrastructure-as-a-service, and that greater use of chips from subsidiary T-Head Semiconductor should support cloud gross margin over time.
The capital requirement, however, is also expanding. Wu said Alibaba may exceed its earlier RMB 380 billion (USD 55.8 billion) capital expenditure figure because demand for compute infrastructure could reach ten times the level of 2022. That places Alibaba roughly in the same broad AI spending cycle as other Chinese internet giants such as Tencent, which also missed revenue and profit expectations in its latest earnings report while increasing AI investment.
Consumption is the second pillar of Alibaba’s spending cycle, but it is a less straightforward proof point than cloud. China e-commerce customer management revenue grew only 1% on a reported basis, though Alibaba said it would have grown 8% excluding the impact of a merchant subsidy program that is now recorded as contra revenue. Quick commerce revenue rose 57% to RMB 20 billion (USD 2.9 billion), driven by order growth after the rollout of Taobao Shangou.
The unit economics are improving, but competition remains intense. Chinese regulators launched a probe in January into price wars and subsidies among food delivery platforms including Meituan, Alibaba, and JD.com, Reuters reported. In April, regulators fined and confiscated RMB 3.6 billion (USD 529 million) from seven e-commerce platforms, including Alibaba’s Taobao Shangou, over food delivery safety violations.
That makes quick commerce both a growth lever and a margin risk. Management said average order value and unit economics improved, while the China e-commerce group’s adjusted EBITA fell 40% to RMB 24 billion (USD 3.5 billion) because of investment in quick commerce, user experience, and technology.
International commerce offered a cleaner profitability signal. Alibaba’s International Digital Commerce business narrowed its adjusted EBITA loss to RMB 138 million (USD 20.3 million) from RMB 3.6 billion, approaching breakeven as AliExpress improved operating efficiency and logistics optimization. That improvement, however, was not large enough to offset the groupwide drag from AI and quick commerce investment.
Alibaba still has the balance sheet to pursue this strategy. It ended March with RMB 520.8 billion (USD 76.5 billion) in cash and other liquid investments, while management pointed to roughly USD 38 billion in net cash, or USD 59 billion excluding debt maturing beyond five years.
There is little evidence that Alibaba is unable to fund the investment cycle. For now, the numbers suggest it can. Investors will, however, ask whether the group’s AI cloud business can scale fast enough, and at high enough margins, to justify a period in which earnings and cash flow are being pushed into the background.
The March quarter made that bargain clearer. Alibaba has more evidence than before that AI demand is real and monetizable. It also has less room to suggest that the payoff has already arrived.
Note: RMB figures are converted to USD at rates of RMB 6.81 = USD 1 based on estimates as of May 14, 2026, unless otherwise stated. USD conversions are presented for ease of reference and may not fully match prevailing exchange rates.