Alibaba's AI Arms Race Takes a Bite Out of Profits as Cloud Growth Accelerates

Alibaba's net profit drops 76% amid heavy AI investment, but cloud revenue jumps 45% and AI-related sales triple digits for 12th straight quarter.

The bill for Alibaba's artificial intelligence offensive has arrived, and it is steep. China's e-commerce giant reported a dramatic 76% plunge in net profit for the first quarter of fiscal 2027, landing at 10.54 billion yuan, as the company pours unprecedented sums into data centers and AI chips. The earnings shock, delivered on Thursday, sent the stock down 7% on Friday to 103.40 euros, deepening its year-to-date decline to 18%.

The financial strain is most visible in the company's free cash flow, which swung from a positive 18.82 billion yuan in the year-ago period to a negative 44.67 billion yuan. Capital expenditures surged 75% to 67.68 billion yuan, a figure that caught the attention of Citi analysts, who expressed concern about the sustainability of the spending trajectory.

Cloud Business Emerges as the Bright Spot

Amid the profit squeeze, Alibaba's cloud division is delivering standout results. External revenue in the segment jumped 45% year-over-year to 48.44 billion yuan, marking the strongest growth in 22 quarters. AI-related revenue within the cloud business has now posted triple-digit growth for twelve consecutive quarters and accounts for roughly 35% of total cloud sales.

The segment's adjusted EBITA climbed 133% to 5.63 billion yuan, demonstrating that the AI push can generate returns even as it demands heavy upfront investment. CEO Eddie Wu pointed to the company's "full-stack AI strategy" and the recent launch of the Qwen 3.8 Max model as evidence of its technological ambitions in the large language model race.

E-Commerce Core Shows Signs of Strain

The picture in Alibaba's traditional stronghold is less encouraging. Fee revenue from the Tmall and Taobao platforms fell 7%, leaving adjusted growth at a meager 1% — well below market expectations. Overall e-commerce revenue declined 8% to 110.9 billion yuan, though the Quick Commerce segment bucked the trend with a 45% surge to 53.3 billion yuan. The company's premium 88VIP membership program now counts 64 million paying members.

One-Time Charges Add to the Pain

Beyond the AI investment cycle, several non-operating items weighed on the bottom line. A goodwill impairment of 4.46 billion yuan and a European Union fine of 550 million euros contributed to the earnings decline, which was slightly less severe than the 75% drop some metrics suggested.

A Long-Term Bet on AI Dominance

Management remains resolute in its commitment to the AI buildout, framing the current margin compression as a necessary cost of long-term competitiveness. Wu has outlined plans for more than 380 billion yuan in investments over the next three years, with a target of reaching breakeven on AI infrastructure spending within roughly three years. The company's five-year goal: combined cloud and AI revenue exceeding $100 billion.

Shares closed Thursday at 111.20 euros, roughly 12% above the 50-day moving average but still 32% below the 52-week high of 164.20 euros. The market's initial reaction to the earnings report was cautious, though the stock stabilized during the session as investors weighed the near-term pain against the potential payoff of Alibaba's high-stakes transformation.