Alibaba Stock Tumbles 7% After Q3 Miss as AI Spending Weighs on Profits

Quick overview

Even though Alibaba Group Holding Limited (NYSE: BABA) doubled down on its long-term artificial intelligence goals, the company’s stock fell precipitously on Thursday after a disappointing third-quarter earnings report that fell short of Wall Street estimates on both the top and bottom lines.

Analyst projections of RMB 10.94 were significantly higher than the company’s reported earnings of RMB 7.09 per American depositary share. Revenue for the December quarter was RMB 284.84 billion, or about $40.7 billion, which was less than the RMB 289.3 billion projection and only a 2% year-over-year increase. By midday on Thursday, shares had dropped about 7.3%, continuing a larger slump that has seen the stock lose about 17% over the previous six months.

Alibaba’s Profits Hit by Price Wars and Rising Costs

A 57% year-over-year decline in adjusted EBITA to $3.35 billion and a 67% decline in adjusted earnings per share to $0.13 were the headlines that most alarmed investors. As the business fights intense competition from rivals like JD.com and Meituan, especially in the rapidly expanding food delivery market, management ascribed the margin pressure to increased spending on promotions, logistics, and user acquisition.

Alibaba’s primary e-commerce sector has always faced difficulties. While the company’s rapid commerce and food delivery activities had some resilience, its larger e-commerce segment gained only 6%, with core business lines essentially unchanged. Weak consumer demand in China has been a persistent drag across the sector.

Cloud and AI Remain Bright Spots

The news wasn’t all bad. With a 36% increase in revenue to $6.2 billion, Alibaba’s Cloud Intelligence Group remained an exceptional performer. Management cited the company’s Qwen AI chatbot’s monthly active user count of over 300 million as proof that its AI approach is working. Strong enterprise adoption in China is indicated by the claimed six-fold increase in token use on the company’s Bailian platform.

Over $100 billion in cloud and AI revenue over the next five years is an ambitious goal that CEO Eddie Wu reiterated, indicating a compound annual growth rate exceeding 40%. Additionally, the business introduced its ATH AI platform and stated that it intends to continue investing heavily in AI infrastructure, such as chips and data centers, for the foreseeable future.

Analysts Remain Cautiously Optimistic on BABA Stock

Analysts have not given up on their positive long-term view in spite of the shortfall. Mizuho noted that short-term challenges from weak demand and high investment spending were the key causes of the estimate reductions, but it kept its Outperform rating while slightly lowering its price target from $195 to $190. The company noted that token costs are increasingly being viewed by business clients as productivity expenditures, a trend that may eventually spur faster-than-anticipated margin improvement and cloud revenue development.

Alibaba’s balance sheet is still reassuring; the business has more cash than debt, and its price-to-earnings ratio of about 22.5, along with its unusually low PEG ratio of 0.3, indicates that the stock may still be cheap in relation to its potential for growth.

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Aiswarya Gopan

Financial Writer & Editor - Asia & Europe Desk

Aiswarya Gopan is a former cybersecurity analyst, tech journalist and market researcher, who joins FX Leaders with over three years of experience in the blockchain industry. Aiswarya's areas of focus include market news out of the Asian and European markets as well as news coverage on cryptocurrencies.