Alibaba’s Profit Drops by Half as AI Spending and Delivery Competition Rise

Chinese e-commerce titan Alibaba Group experienced a 50% decline in net profit during the second quarter of its fiscal year, primarily due to substantial investments in artificial intelligence and ongoing competition in the food delivery market.

For the three months ending September 30, net profit dropped 53% to CNY20.6 billion (USD2.9 billion) compared to the same period last year, according to the company’s recent earnings report.

Revenue increased by 5% to CNY247.8 billion (USD34.8 billion), surpassing analysts’ expectations of CNY245.2 billion. Excluding income from recently divested businesses like Sun Art and Intime, revenue on a comparable basis grew by 15%.

Operating income plummeted 85% to CNY5.4 billion (USD754 million), mainly due to investments in quick commerce, user experience enhancements, and technology. This decrease was somewhat offset by strong growth in e-commerce revenue, improved performance in cloud services, and increased operational efficiencies across multiple divisions.

Focus on Artificial Intelligence

“We are entering an investment phase aimed at building long-term strategic value in AI technologies, infrastructure, and a comprehensive platform that merges daily life services with e-commerce,” said the company’s CEO. “Thanks to our significant strategic commitments, our core businesses in AI, cloud computing, and consumer services continued to show strong growth this quarter.”

Demand for AI solutions has further propelled the growth of the Cloud Intelligence Group, with revenue climbing 34% to CNY39.8 billion, mainly driven by increased public cloud revenue and rising adoption of AI-related products.

“Over the last year, we have invested approximately CNY120 billion in AI and cloud infrastructure,” remarked the company’s CFO.

In February, it was announced that the company would invest CNY380 billion over three years in cloud and AI infrastructure — surpassing the total technology investments made over the previous decade.

Leadership confirmed plans to further boost their AI investments during the earnings call.

The global supply chain for AI components, from semiconductors to memory chips and CPUs, has been tight since mid-year, said the CEO, predicting this growth phase driven by AI demand will last at least two to three years, with ongoing shortages of key resources.

“We do not believe there will be an artificial intelligence bubble in the next three years,” he added, noting that the CNY380 billion investment plan may now be seen as somewhat conservative.

Food Delivery Competition

Earlier this year, a rival introduced a food delivery service, igniting a price war. In response, the company launched its instant retail platform, Taobao Flash Buy, using its existing delivery network, Ele.me, and announced a CNY50 billion (USD7.1 billion) investment over the following year to subsidize user costs.

Revenue from rapid delivery operations grew 60% year-over-year to CNY22.9 billion in the September quarter, largely driven by increased order volume following the launch of Taobao Flash Buy.

The company is actively working to reduce losses associated with Taobao Flash Buy. As of October, the loss per order had halved from mid-year levels due to optimized order processing and lower logistics costs, according to the CEO of its China e-commerce division.

Management also indicated plans to focus on operational efficiency and scale back investment in delivery services moving forward.

During the peak investment quarter, the overall efficiency of Taobao Flash Buy is expected to improve, and investments will decrease significantly in the upcoming quarter, according to executives.

As of markets, the company’s shares traded down 1.6% at HKD155.30 (USD19.96) during mid-morning trading in Hong Kong, after a 2.4% drop at open. In New York, the stock declined 2.3% to USD157.01 yesterday.

Note: The contributors to this report.