The Chinese tech heavyweight reported a 75% plunge in quarterly profit on Thursday, with the decline tied directly to heavy artificial intelligence investment. Revenue for the June quarter came in at 268.95 billion yuan, up 9% year over year and just ahead of the 268.88 billion yuan LSEG estimate.
Spending on infrastructure, data centers, and chip inventory reached 67.7 billion yuan ($10 billion) in the quarter, a 75% jump. The company attributed the increase to customers shifting when they made purchases, expanded CPU-compute capacity, and rising prices for various chip components.
The stock slid about 5% in early trading following the earnings release.
The results underscore the tension between Alibaba's AI push and its bottom line. The company has made AI a central growth area, with its cloud unit serving as the main monetization engine. At the same time, the scale of spending on infrastructure and chips is weighing on profitability, leaving investors to assess whether the investment cycle will eventually produce returns.
Because AI demand is strong, Alibaba has increased prices for AI compute and storage offerings by as much as 34% since March, a move reported earlier this year. The company is simultaneously paying more for the underlying hardware while charging customers more for the finished AI services.
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Alibaba's cloud division, considered the company's most important AI monetization engine, generated 48.4 billion yuan in revenue, up 45% from the prior year period. The unit's performance is closely watched as a gauge of how well Alibaba is capitalizing on the AI boom, similar to how investors view Microsoft and Google's cloud operations.
In a statement, CEO Eddie Wu said, "With our full-stack AI strategy, we have put Alibaba in a superior position to capture the substantial growth of demand for artificial intelligence and AI compute." Wu added that AI-related product revenue grew at a triple-digit clip for twelve straight quarters.
Citi analysts noted in a research note that Alibaba's new disclosures on its AI Labs and Applications segment give investors a clearer view of the company's AI investments and product momentum. However, they cautioned that the 75% capex increase and a 44.7 billion yuan free cash flow deficit could raise questions about capital needs and returns on those investments.
The company's net income fell 75% year over year, reflecting the scale of its AI push. Alibaba has positioned AI as a core growth driver, with its cloud unit serving as the primary monetization channel. Management's full-stack AI approach spans infrastructure, models, and applications, but the heavy upfront spending is compressing margins and cash flow.
The capital expenditure surge also signals that Alibaba is betting big on building out compute capacity to meet surging demand for AI services. While cloud revenue growth of 45% shows the strategy is gaining traction, the market's reaction indicates skepticism about when these investments will translate into meaningful profit expansion. Investors are weighing the potential long-term upside against the near-term earnings drag.
The coming quarters will be critical as Alibaba continues to scale its AI offerings. If demand remains strong and pricing power holds, the current spending could pay off. But if the AI cycle cools or competition intensifies, the heavy outlays could weigh on returns for an extended period. For now, the market is taking a cautious stance, as reflected in the 5% share drop.
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