Alibaba's quarterly capital expenditure surged to nearly $10 billion in its most recent quarter, as the Chinese tech giant accelerates its AI infrastructure buildout. But the massive spending is raising uncomfortable questions about circular financing in the AI industry — a practice where tech companies effectively buy from each other, inflating demand signals and potentially masking the true return on investment.

The Numbers

Alibaba increased its quarterly capex to approximately $10 billion, a dramatic acceleration that reflects the company's determination to compete in the global AI race. The company previously announced plans to invest up to 380 billion yuan ($55.96 billion) over three years in AI infrastructure.

However, Alibaba's profit plunged following the spending increase, with total revenues growing only 2% year-over-year — well below market expectations.

What Is Circular Financing?

Circular financing in the AI context refers to a pattern where:

1. Chip makers sell to cloud providers (e.g., Nvidia sells GPUs to Microsoft, Google, Amazon) 2. Cloud providers sell compute to AI companies (e.g., Microsoft Azure hosts OpenAI's training) 3. AI companies use cloud compute to build models that compete with the cloud providers' own AI offerings 4. The same companies invest in each other, creating a web of mutual dependencies

This creates a closed loop where money circulates among a small group of companies, making it difficult to determine genuine end-user demand versus artificially inflated orders. Bloomberg reported that concerns about this pattern are growing among analysts and investors.

The Broader Context

Alibaba is not alone. The combined AI capital expenditure of the four largest tech companies — Amazon, Microsoft, Alphabet (Google), and Meta — is projected to reach approximately $725 billion in 2026:

- Amazon: ~$200 billion (raised to $220 billion) - Microsoft: ~$190 billion - Alphabet: $175-185 billion - Meta: $115-135 billion

This level of spending is unprecedented in corporate history and has drawn comparisons to the telecom bubble of the early 2000s, when massive infrastructure investments preceded a dramatic market correction.

Why It Matters

The circular financing concern is significant because:

1. Investor confidence: If much of the AI infrastructure spending is circular, the actual return on investment may be far lower than projected 2. Market correction risk: A sudden realization that demand is artificially inflated could trigger a sharp sell-off in AI-related stocks 3. Competitive distortion: Companies with the deepest pockets can artificially dominate by outspending competitors, even if the spending doesn't generate proportional returns 4. Systemic risk: The interconnected nature of AI investments means a failure in one part of the chain could cascade through the ecosystem

Nvidia, which supplies the chips powering much of this infrastructure, faces its own scrutiny as analysts question whether the current pace of spending is sustainable. The company's earnings preview is being closely watched for signs of whether the AI investment boom is approaching a plateau.

Sources