Key Points
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Alibaba looks cheap, but its earnings are falling sharply while AI and instant-commerce spending drain cash.
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Cloud growth is promising, but it isn’t yet big enough to offset those costs.
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For me, that makes BABA a risky turnaround story, not a once-in-a-decade bargain.
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Alibaba (NYSE: BABA) closed below $115 on Aug. 31, putting it about 60% below its all-time closing high of $298.65 set in October 2020. The math on that drawdown may look like a gift. I do not think it is one, and here are three reasons why.
Reason No. 1: The earnings base is collapsing while revenue grows
This is the part that breaks the “cheap stock” framing. In the June quarter, Alibaba grew revenue 8.6% to RMB 268.95 billion. But net income excluding extra items fell 75.6% to RMB 10.54 billion from RMB 43.12 billion a year earlier. Basic earnings per share (EPS) dropped from RMB 18.57 to RMB 4.51.
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Profit margins compressed from 14.8% to 7%. When you buy a stock 60% off its high, you are implicitly assuming that the earnings that justified the old price still exist. Here, they have been cut by three-quarters. Adjust the multiple for that, and the discount shrinks fast.
Reason No. 2: The AI build-out consumes cash rather than generating it
Capital expenditure hit RMB 67.7 billion in the quarter, up 75% year over year. Free cash flow swung to an outflow of RMB 44.67 billion. Alibaba has spent RMB 190 billion of an RMB 380 billion three-year plan, so it is halfway through, and the spending is not linear.
Management was candid about the trade-off. The CFO said that at current margins, keeping cloud growth below 33% would generate positive cash flow, but the company is choosing to make aggressive investments instead. Break-even on AI capex takes three years at current gross margins, potentially 2.5 years if margins improve.
Image source: Getty Images.
The cloud business is genuinely good. External revenue grew 45%, a 22-quarter high, with EBITDA margin at 12% and AI product revenue at an RMB 49.5 billion annual run rate. But it is not yet large enough to offset the group drag. The stock fell about 9% the day these results landed, despite that acceleration.
Reason No. 3: The instant commerce war has no clean exit
In 2025, HSBC (NYSE: HSBC) estimated that Alibaba lost as much as RMB 87 billion in instant retail over 12 months. The company incurs roughly RMB 2 to 5 per order. It treats this as customer acquisition cost rather than operational failure, and maybe that framing is right. However, it means a second uncapped spending program running alongside the AI build-out, funded by the same balance sheet.
There is a bigger point here that bulls tend to skip. Alibaba is fighting an expensive, grinding war for a domestic market it already knows well, against a competitor that will not fold. Meituan cut its quarterly operating loss from RMB 16.1 billion to RMB 6.5 billion and still holds roughly 70% of orders with an average value above RMB 30, where the margin actually lives.
Meanwhile, the market that people imagine Alibaba eventually cracking is close. Amazon (NASDAQ: AMZN) holds roughly 37.6% to 40.5% of the United States e-commerce market, with Walmart (NASDAQ: WMT) a distant second near 6.4%. Add Shopify‘s (NASDAQ: SHOP) 14%, and those two platforms account for about half of all United States online spending. Alibaba does not register in that table. It never has, and the combination of logistics density, Prime lock-in, and political sensitivity around Chinese platforms means it never will, in my opinion.
What the setup actually is
Alibaba has lots of cash reserves and can absorb this. Cloud growth is accelerating, AI products carry higher gross margins than the rest of the portfolio, and management targets RMB 100 billion in external cloud revenue by 2030 at 20% gross margins.
That is a credible long-term story. It is not a once-in-a-decade setup. A once-in-a-decade setup is a healthy business priced for disaster. This is a business voluntarily suppressing its earnings on two fronts simultaneously, with no committed end date for either, while free cash flow is negative.
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HSBC Holdings is an advertising partner of Motley Fool Money. Micah Zimmerman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Shopify, and Walmart. The Motley Fool recommends Alibaba Group and HSBC Holdings. The Motley Fool has a disclosure policy.
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