Under the Spotlight Wall St: Alibaba (BABA)

Alibaba ($BABA) celebrated its 26th anniversary this week with a 55% rally in Q1 that left its more fancied U.S. rivals looking more like the ‘Lagnificent 7’. 

During the quarter, the Chinese tech giant’s shares soared to the highest level since late 2021 on big spending AI plans, impressive results from its own AI models and quarterly earnings that beat analyst expectations. $BABA shares (which are also listed in Hong Kong) smoked the 15% decline in the Magnificent 7 stocks.

Alibaba shareholders will be hoping the gains are a downpayment on better returns from a company that hasn’t lived up to the hype of its IPO – the world’s largest back in 2014 and still ranking as the #2. The company has been the flagbearer for China’s tech sector since its founding on 4 April 1999, but its shares have ‘only’ gained 90% from its IPO price – not much compared to the massive gains from the Mag 7 over the past decade.  

The Chinese government’s moves to block the Ant Financial IPO and tighten internet regulations have weighed on Alibaba since 2020. But now that it competes for AI supremacy against the U.S., Beijing has embraced the tech sector. Alibaba founder Jack Ma was even invited to a recent meeting with President Xi Jinping, an audience meant to signal the importance of cutting-edge tech in China’s development. 

Red bull 

Alibaba is all in on AI and cloud: it’s the fourth largest cloud provider globally and the largest in Asia. CEO Eddie Wu has embraced a ‘user first, AI-driven strategy’ across all its businesses, including its best known: e-commerce. Wu believes artificial intelligence is the most valuable commodity of the future, akin to electricity today, and that cloud computing networks are the equivalent of the power grid. Clients seem to agree: revenue from its cloud intelligence business was up 13% year-on-year in Q3. 

Wu’s pledge to ‘aggressively invest’ in new technology has been backed by plans to spend CN¥380b (US$52.4b) on AI and cloud computing infrastructure over the next three years. This exceeds Alibaba’s total spending on AI infrastructure over the past decade, and will be China’s largest computing project financed by a single private business.It’s half the initial US$100b investment promised for the Stargate AI plan, but that bill will be split between OpenAI, Oracle ($ORCL) and Softbank ($SFTBY). The investment comes as companies like Apple ($AAPL) and BMW choose Alibaba to provide AI for their products in China.  

Alibaba’s own AI model, Qwen, is key to driving continued revenue growth from the cloud intelligence business. Qwen 2.5-Max, its flagship AI foundation model, has achieved strong performance across multiple benchmarks like coding and mathematical reasoning. Alibaba isn’t slacking off as the competition rises, with reports the company will release an upgraded Qwen 3 model later this month. Wu argues that differences between large language models are starting to narrow, which he believes is actually ‘highly favourable’ for cloud computing providers as all models will be hosted on cloud computing infrastructure. 

BABA shop

In Alibaba’s huge Chinese e-commerce businesses, its AI-powered digital marketing tool Quanzhantui was rolled out to boost revenues from its Taobao (consumer-to-consumer) and Tmall (business-to-consumer) marketplaces.  

Revenue for Taobao and Tmall Group (TTG) was CN¥136.1b in Q3, an increase of 5%. Customer management revenue increased 9%, primarily driven by the growth in online gross merchandise volume. Customer management revenue is the single largest source of Alibaba’s revenue. The growth in TTG revenues reflected the first full-quarter impact of a new software service fee and the increasing adoption of Quanzhantui. 

Alibaba is also working hard to protect its share of wallet against rivals like JD.com ($JD) and PDD ($PDD). Efforts to expand its user base and investments in user experience led to strong growth in new consumers and orders. In Q3, the number of 88VIP members reached 49m, with increasing average revenue per user. It comes amid tentative signs of a rebound in Chinese consumer spending, helped by government policies to boost confidence amid a property market slump. 

Express lane

Alibaba’s e-commerce business outside of China is growing strongly as well. Revenue from its Alibaba International Digital Commerce (AIDC) unit grew 32% to CN¥37.8b in Q3, driven by solid performance of cross-border businesses. Revenue from the retail business increased by 36% to CN¥31.6b, primarily from AliExpress and Trendyol.

Wu reckons AIDC will deliver its first profitable quarter in the next financial year, helped by a focus on operational efficiencies. That upbeat view is shared by Jiang Fan, who runs Alibaba’s e-commerce business. He told analysts that AIDC’s B2B business will maintain a relatively stable trajectory over the next few years and generate ‘considerable profits’. He expects its B2C cross-border business to see a ‘significant improvement’ in unit economics. 

Alibaba continues to invest in local platforms to drive future growth. In late 2024, the company invested US$71m in South Korea’s Ably, a startup specialising in women’s clothing, including lesser-known brands. This followed a strategic partnership with Indonesia’s GoTo in September. GoTo is the largest digital ecosystem in Indonesia and was formed through a merger of the Gojek ridehailing service and the Tokopedia e-commerce platform. The five-year deal will see Alibaba maintain its current investment in the business, while GoTo will use Alibaba Cloud. 

Checkout

Alibaba is investing in the infrastructure and AI models needed to make sure it remains on the cutting-edge of innovation – and a serious challenger on the world stage. Its massive rally has shown there are ways to get exposure to the AI and cloud computing boom beyond the big U.S. tech stocks. 

A rebound in consumer spending is a tailwind, as is the newfound appreciation for the tech industry from the Chinese government. But history shows Alibaba’s fortunes depend on its ability to play by Beijing’s rules, not bend them. 

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.