Alibaba Group Holding Ltd. (NYSE: BABA) is leaning more heavily on artificial intelligence and cloud computing to drive its next phase of growth. However, heavy technology spending, weaker e-commerce performance and subdued consumer demand in China are weighing on profits and cash flow.
Revenue Rises, but AI Spending Weighs on Profit
Alibaba reported fiscal first-quarter 2027 revenue of $39.64 billion, up 9% year over year and above the $38.63 billion analyst estimate.
However, adjusted earnings per ADS fell 42% to $1.26, missing expectations of $1.85. Adjusted net income declined 38% to $3.05 billion, while adjusted EBITA fell 30% to $4.03 billion. Net income plunged 75% to $1.54 billion.
Alibaba attributed much of the earnings pressure to technology investments. Stronger cloud results and improved efficiency across other businesses partly offset the impact.
Cloud and AI Drive Growth
AI Cloud and Compute Services revenue jumped 45% to $7.14 billion as customers increased their use of public cloud and AI products. AI-related product revenue reached $1.82 billion, marking a 12th straight quarter of triple-digit year-over-year growth.
CEO Eddie Wu has put AI and cloud at the center of Alibaba's strategy. He has said the company will prioritize AI growth over near-term profits and invest beyond its previously announced 380 billion Chinese yuan three-year spending plan. Alibaba aims to grow cloud and AI revenue to $100 billion over five years.
Alibaba has also reorganized around that strategy. It combined Cloud Intelligence with chip designer T-Head and consolidated key AI research and products. Meanwhile, the company has sold non-core assets, including Lingxi Games.
E-Commerce Weakness Contrasts With AI Boom
Alibaba's China E-commerce Group revenue fell 8% to $16.35 billion. International E-commerce revenue slipped 1% to $4.09 billion as weak Chinese consumption pressured its traditional retail operations.
The company is also working to connect its AI and commerce businesses through products such as Qwen Shopping Assistant and the Qwen app. Alibaba combined its China e-commerce, international commerce and Freshippo businesses to generate greater operating synergies across its shopping platforms.
Analysts Watch Returns on AI Spending
Bloomberg Intelligence analysts Catherine Lim and Jason Zhu believe Alibaba's AI advantage could become easier to quantify in 2027 if returns on each yuan invested continue to improve. They also expect easing competition in delivery services to support operating cash flow.
However, the analysts cautioned that record capital spending on proprietary chips, AI applications and other technology could absorb much of those cash flow gains.
Alibaba reported an 11% increase in operating cash flow to $3.38 billion. However, investments in cloud infrastructure contributed to $6.58 billion in free cash flow usage. The company ended June with $69.93 billion in cash and other liquid investments.
During Thursday's earnings call, an Alibaba executive said the company could break even on AI-related capital expenditures in about three years, based on current average gross margins.
The executive also said Alibaba Cloud is undergoing a broad upgrade toward an "agentic cloud" model. The company expects AI and cloud revenue growth to accelerate further in the coming quarter.
Alibaba also expects productivity agents to become another driver of annual recurring revenue growth.
BABA Price Action: Alibaba shares were down 3.24% at $124.73 during premarket trading on Thursday, according to Benzinga Pro data.