Alibaba's quarterly profit plummeted 75% as China's largest technology company poured billions into artificial intelligence infrastructure, revealing the stark financial tradeoffs companies face in the global AI race.
The company reported a 75% fall in net profit for the April-June quarter, dropping to approximately 11.3 billion yuan ($1.6 billion), while capital expenditure surged 75% to 67.7 billion yuan ($10 billion) — far exceeding analyst forecasts of 29.2 billion yuan. Alibaba had already spent half of its planned 380 billion yuan ($56.4 billion) AI investment for 2026-29 in just the first half of the year.
Despite the profit erosion, Alibaba's AI cloud and compute services revenue rose 45% to 48.4 billion yuan, with its AI model-as-a-service business surpassing 16 billion yuan in annual recurring revenue. Total revenue for the quarter grew 9%, meeting analyst expectations.
CEO Eddie Wu told analysts the company expects to break even on AI-related capital expenditure within three years based on current margins. A key part of that strategy is deploying Alibaba's proprietary T-head chips in data centers, which Wu said will yield substantially higher gross margin as well as profitability once scaled.
In order to be able to capture that future growth, we first need to make these capex investments to build out the necessary compute capacity, Wu said on the earnings call.
Alibaba is locked in an intensifying battle with Chinese tech giants and startups to release more capable, lower-cost frontier AI models. The company recently reorganized into four main units — e-commerce, AI cloud and computing, AI model applications, and other operations — and spun off its AI businesses into a dedicated Alibaba Token Hub group.
Wu said the company will continue investing in frontier AI models despite current monetization gaps, because it is committed to reaching artificial general intelligence. AI model companies have their eyes on that ultimate end game, where I think that the monetization level will be significantly higher, he said.
The earnings report sent Alibaba's U.S.-listed shares down 4.6% in early trading, as investors weighed the massive spending against the still-nascent revenue returns.
