Alibaba Shares Surge on AI-Fueled Cloud Sales Growth

Alibaba Group Holding (BABA) reported stronger-than-expected revenue for its fiscal second quarter, fueled by a significant acceleration in its cloud computing division. The results signal a potent resurgence in a key growth area for the tech giant, particularly as artificial intelligence (AI) becomes a central battleground.

Alibaba’s New York-listed shares experienced a premarket surge of approximately 4.3%, reflecting investor confidence despite a notable dip in overall profitability. The market reaction underscores the strategic importance of Alibaba’s cloud and AI initiatives.

Here’s a breakdown of the company’s performance for the fiscal second quarter ended September 30, compared to LSEG estimates:

• Revenue: Rose 5% to 247.8 billion Chinese yuan ($34.8 billion), surpassing the previous year’s 242.65 billion yuan.

Investors are particularly focused on Alibaba’s cloud computing segment, now intrinsically linked to its AI capabilities. The past several quarters have revealed an accelerating growth trajectory for Alibaba Cloud, indicating increasing market adoption and the effectiveness of its AI-driven services. This growth is happening despite increased global competition in the cloud service market, and signals that Alibaba is successfully carving out a distinct market within China and potentially beyond.

Alibaba reported a 34% year-on-year surge in cloud computing revenue, reaching 39.8 billion yuan, exceeding analysts’ expectations of 37.9 billion yuan. This growth rate outpaced the 26% growth observed in the June quarter. The numbers suggest not just growth, but *accelerating* growth, a valuable signal for prospective investors.

The Chinese tech conglomerate attributed this robust performance, in part, to its strategic investments in AI, which are beginning to pay dividends.

“Robust AI demand further accelerated our Cloud Intelligence Group business, with revenue up 34% and AI-related product revenue achieving triple-digit year-over-year growth for the ninth consecutive quarter,” stated CEO Eddie Wu in the earnings release on Tuesday.

Wu emphasized the strong demand for Alibaba’s AI offerings, stating that it’s “accelerating.” He further added, “Certainly, we see that customer demand for AI is and remains very strong. In fact, we are not even able to keep pace with the growth in customer demand … in terms of the pace at which we can deploy new servers,” pointing to potential infrastructure constraints amidst the rapid adoption of their AI solutions, and potentially, the need to further ramp up infrastructure spending to fully meet customer needs.

In September, Alibaba announced plans to increase its capital expenditure on AI models and associated infrastructure development, supplementing the pre-existing commitment of 380 billion yuan ($53 billion) over three years announced earlier in February. During the past four quarters, Alibaba has reportedly allocated approximately 120 billion yuan in capital expenditure toward AI and cloud infrastructure.

Addressing the capex figures, Wu acknowledged that the original target of 380 billion yuan “might be on the small side,” hinting at the possibility of increased investment in response to sustained strong demand. He indicated that Alibaba “wouldn’t rule out further scaling up that capex investment,” indicating the company is poised to aggressively pursue AI opportunities.

Alibaba is rapidly positioning itself as a frontrunner in China’s rapidly evolving AI landscape. Just recently, the company reported that its Qwen app, which is designed as a direct competitor to OpenAI’s ChatGPT, amassed over 10 million downloads within the first week following its public launch. Qwen is powered by the company’s proprietary Qwen family of artificial intelligence models. The impressive download rate underscores the intense competition in the global AI space and Alibaba’s aim to be a dominant player.

Earnings before interest, taxes, and amortization (EBITA), a key measure of profitability, showed a positive increase of 35% to 3.6 billion yuan for its cloud division.

Alibaba has been proactively investing in the highly competitive instant commerce market, which includes super-fast delivery of select items – a growing trend among Chinese e-commerce firms. These investments, while yielding positive topline growth, are currently affecting Alibaba’s overall profitability, even with the strong performance of the cloud computing business.

Overall adjusted EBITA, a profitability metric closely monitored by analysts, dropped 78% year-on-year to 9.1 billion yuan. Alibaba attributed this decline, in part, to ongoing investments in its quick commerce initiatives. This signals the strategic importance the company places on this market segment, even at the expense of immediate profit.

However, investors are reacting positively, likely driven by the acceleration in both the cloud computing business and Alibaba’s core China e-commerce division. The China e-commerce segment, which houses revenue from Taobao and Tmall, as well as its quick commerce service, grew 16% year-on-year to 132.6 billion yuan, a growth rate that beats the previous quarter.

Revenue from quick commerce surged 60% year-on-year in the quarter, compared to only 12% the previous quarter, confirming the market’s appetite for this service model.

“In our consumption business, quick commerce continued to scale with significant improvement in unit economics and drove rapid growth in monthly active consumers on the Taobao app,” Wu stated.

Jiang Fan, who is responsible for Alibaba’s e-commerce business, referred to quick commerce as “strategic pillar” and revealed the company’s ambitious goal to attain 1 trillion yuan in gross merchandise value (GMV), the total value of transactions across the platform, within the next 3 years. This aggressive target confirms Alibaba’s long-term commitment to the quick commerce market.