Profits plummeted 75%, Cloud rose 45%: What does Alibaba think?

NEXT PICK · Market Insights

Profits plummeted 75%, Cloud rose 45%: What does Alibaba think?

Tuesday, August 25, 2026

One company posted quarterly revenue of $39.639 billion, up 9% year-on-year, with cloud and AI business accelerating to 45%, which sounds like an impressive report card; But in the same financial report, net profit dropped 75% year-on-year, leaving only $1.539 billion, with free cash flow showing a net outflow of $6.584 billion. The market's reaction was also direct—on earnings day, U.S. stocks fell about 5%, and four days later, a $10.2 billion placement announcement was dropped, causing the stock price to drop another 3.4% in pre-market trading. At this moment, BABA closed at $119.44, up 0.82%, with a price-to-earnings ratio of 27.02 times, and the 200-day moving average still hovering above $137.54. On one side is AI revenue with triple-digit growth for twelve consecutive quarters; on the other, capital expenditures that have smashed the income statement—is this a necessary price for transformation, or a gamble with no return ticket?

Latest price $119.44 ▲ +0.82%

AI cloud is accelerating +45% ▲ Year-on-year

Quarterly free cash flow -$6.584 billion ▼ From positive to negative

An e-commerce empire is reinventing itself into a computing power company

Alibaba is registered in the Cayman Islands and headquartered in Hangzhou, with a business spanning e-commerce, cloud computing, logistics, digital media, and health services. Chinese e-commerce groups hold Taobao, Tmall, Taote, 1688, and Xianyu; The international digital commerce group manages AliExpress, Turkey's Trendyol, Southeast Asia's Lazada, and South Asia's Daraz; Cloud Intelligence Group offers full-stack capabilities from Infrastructure as a Service (IaaS), Platform as a Service (PaaS) to Model as a Service (MaaS); Other companies include AutoNavi, Cainiao, Youku, Hema, and Alibaba Health.

But the revenue structure in the June quarter has quietly shifted the company's focus. E-commerce group revenue was RMB 205.862 billion (about USD 30.34 billion), up only 4% year-on-year, with adjusted EBITA even slightly down 1%; Meanwhile, AI cloud and computing services revenue reached 48.437 billion RMB (about 7.139 billion USD), a year-on-year surge of 45%. Among them, pure AI-related product revenue was 12.376 billion RMB, marking the twelfth consecutive quarter of triple-digit growth.

In other words, the old engine that is still making money is slowing down, while the new engine that is burning money is accelerating.

Where exactly is the moat? Taobao focuses on long-tail non-standard products and social scenarios, while Tmall serves brands and quality consumption. The user behavior data and merchant resources accumulated over more than a decade across both platforms are difficult to replicate; Merchants' accumulation in store ratings, review history, and search authority, while consumers' binding in delivery addresses, Alipay, and membership systems together constitute migration costs.

Cainiao's closed loop from warehousing and trunk lines to last-mile delivery is infrastructure that pure platform competitors cannot offer. Alibaba Cloud's MaaS allows enterprise clients to directly call models without building their own AI infrastructure; the Tongyi Qianwen family has been downloaded over 3 billion times globally and has more than 300,000 derivative models.

If I had to give an analogy,

Alibaba now resembles a completed commercial city, digging a subway beneath its foundation—until the metro is completed, the city's cash flow will keep bleeding, and no one can guarantee that foot traffic will come. **

Behind the 27x P/E ratio lies a denominator distorted by profit collapse

Let's start with a static snapshot

Stock price $119.44, market capitalization about $286.3 billion, price-to-earnings ratio 27.02, earnings per share of $4.42, beta coefficient of only 0.51. Looking at just 27 times, that's not expensive for a Chinese internet market leader whose revenue is still growing; But the denominator of this multiple is being pushed back step by step by AI input.

Net profit for the June quarter was 10.444 billion RMB (about 1.539 billion USD), down 75% year-on-year; Diluted earnings per ADS were 3.71 RMB (about $0.55), down 79% year-on-year. Excluding one-off factors, non-GAAP net profit was RMB 20.715 billion, narrowing the decline to 38%, and non-GAAP earnings per ADS were RMB 8.52 (about $1.26), down 42%.

**So here's the question

When profits themselves are being actively sacrificed, is rolling P/E still a meaningful anchor? ** The seller's answer is to bypass it—based on forward-looking profitability, the market generally estimates valuations at just over thirteen times, which is a significant discount compared to US cloud computing peers.

The cash flow side is more straightforward. Operating cash flow was 22.945 billion RMB (about 3.382 billion USD), up 11% year-on-year, indicating the main business's ability to generate cash is not compromised; However, capital expenditure soared to 67.678 billion RMB (about 9.975 billion USD), a year-on-year surge of 75%, directly dragging free cash flow into a net outflow of 44.67 billion RMB (about 6.584 billion USD).

The $10.2 billion placement announced on August 24 is a necessary footnote to this cash flow curve—When the bill for self-built computing power is so large that operating cash flow can't cover it, financing is no longer an option.

The body of a mature company, the ledger of a growing company

Looking at the company's life cycle, Alibaba is undoubtedly in a mature phase: founded in 1999 and twenty-seven years ago, Taobao launched in 2003, and Tmall's predecessor was established in 2008, having gone through multiple business cycles; The US stock market has been listed for many years, with a comprehensive information disclosure and investor relations system; Its business has expanded from a single e-commerce platform to a diversified group in e-commerce, cloud, logistics, digital media, and health, forming a standard blue-chip large-cap model.

But market pricing does not fully embrace this "mature" label. The 50-day moving average of $114.47 is below the stock price, indicating that short-term funds have started to take hold; The 200-day moving average is as high as $137.54, well above the current price, and the long-term trendline remains sloping downward. The 52-week range has climbed from $91.99 all the way to $192.67, with volatility more like a growth stock than a blue chip.

Why would a mature company be traded into a growth stock seeking a new narrative? Because its valuation anchor is shifting from "how much money e-commerce can make" to "how fast cloud energy can grow," and the market has yet to reach a consensus on this shift.

Three fronts opened fire simultaneously, and the moat was being squeezed from both sides

In the domestic e-commerce sector, JD.com has adopted a hybrid model of self-operated plus third-party operations and self-built logistics for fulfillment timeliness, firmly maintaining standardized categories like 3C and home appliances. Its long-term valuation trades at around 12 times price-to-earnings ratio, reflecting the market's recognition of its profitability certainty rather than growth potential. Pinduoduo is attacking from the other end—social viral growth combined with low-price subsidies, cutting into lower-tier markets and white-label products, directly targeting Taobao's mid- to low-priced segment.

On the international front, Amazon is a global giant in both e-commerce and cloud services, while AWS leads the global IaaS/PaaS market, offering it a price-to-earnings premium of about 40 times; However, AWS is subject to regulatory restrictions in the Chinese market, while Alibaba Cloud still holds a home advantage domestically. Microsoft Azure and Google Cloud have heavily invested in AI and machine learning services, while Alibaba's MaaS is a domestic differentiator, but there is still a gap in global market share and technological depth.

Local life is led by Meituan in food delivery, hotel travel, and in-store delivery, directly competing with Ele.me and Taoxianda; Tencent, meanwhile, uses WeChat Pay and mini-program e-commerce to form a side-wing replacement for Alibaba from both social and payment sides.

If we compare the moat to a city wall, Ali's problem isn't that the wall isn't high enough, but that five groups are knocking on different gates at the same time. Network effects, data assets, and logistics fulfillment remain solid bricks, but Pinduoduo's low prices and Tencent's payment ecosystem and regulatory uncertainties are all pouring water into the cracks.

A pool worth 15 trillion yuan and a 40% territory

China's online retail market is estimated to exceed 15 trillion RMB (about 2.1 trillion USD) by 2025, with a compound annual growth rate of about 8-10% over the past five years. Considering consumption upgrading and penetration into lower-tier markets, the total market volume is expected to grow by 6-9% from 2026 to 2028, reaching 17 to 18 trillion RMB by 2028.

Alibaba's service market includes several segments

Physical merchandise retail covered by Taobao and Tmall accounts for about 40-45% of China's online retail share; B2B wholesale covered by 1688, with a market size of about 3-4 trillion RMB; China's public cloud market is expected to reach about 400 billion RMB by 2025, and is expected to exceed 600 billion RMB by 2028, with an annual growth rate of 15-20%; Overseas e-commerce covers Southeast Asia, Turkey, and South Asia, with a combined scale of about $150 to $200 billion. A comprehensive estimate of the market it can serve is about 8 to 10 trillion RMB.

Based on current market share, this translates to about 4.5 to 5.5 trillion RMB in the market—Taobao and Tmall hold about 40-45% of physical e-commerce, Alibaba Cloud about 30-35% of domestic public cloud, and international e-commerce is still in the investment phase, with a share of about 3-5%.

The ceiling isn't low, but the position of incremental growth has changed. The growth rate of the e-commerce sector has already caught up with or even slightly lowered the industry; the real slope lies in public cloud and AI computing power—which is precisely where capital spending goes. This estimate assumes a moderate macro recovery, stable regulation, and no disruptive changes in the competitive landscape. If any one fails, the forecast may need to be revised down by 10-20%.

Converting profit into computing power is a gamble on pricing power three years from now

The logic of bulls is not complicated

Accept today's poor profit statement in exchange for tomorrow's position in China's AI computing power market. Supporting this logic are several anchor points already verified by financial reports and public information.

▲ Bull Case

From a "money-making platform" to a "money-burning infrastructure," the valuation system needs to be reassessed

The bears' core concerns are equally clear

This is not a one-time investment peak, but a shift in business model attributes—from high-margin, low-capital platform businesses to low-margin, asset-heavy infrastructure businesses, and the market has never given the latter a multiple of the former.

▼ Bear Case

A lawsuit, a year-end KPI, a cost curve

In the coming quarters, BABA's stock price will likely be dominated by three types of events: whoever lands first will gain pricing power for the next round:

•	1260H military-related list litigation progress: Phased results expected around Q4 2026, with high impact direction
•	Model as a Service annual recurring revenue target of 30 billion yuan: acceptance by the end of 2026, directly determining AI narrative credibility, with a relatively high neutral impact
•	Commercialization of Tongyi Qianwen 3.8-Max open-source weight model and implementation of revenue-sharing mechanism: Neutral to positive impact
•	Regulatory or judicial handling of the distillation dispute of the Tongyi Qianwen model: timing to be determined, impact neutral
•	Rising costs for AI servers and semiconductor packaging squeeze cloud business profit margins: Continued in the second half of 2026, with a negative impact
•	Capital expenditure and free cash flow curve in the next quarterly earnings report: Whether a peak turning point has been seen is the most critical window to watch for the year

From the $319 peak to today's spot below 40%.

Looking back at this curve, in September 2014, Alibaba listed on the New York Stock Exchange at an issue price of $68, raising $25 billion, setting a record for the largest IPO at the time. On the first day, it surged 38% to $93.89, with its market value surpassing $230 billion. The real highlight came in October 2020, when the stock price hit a historic peak of about $319, and anticipation of Ant Group's IPO pushed the narrative of a "fintech empire" to the extreme.

Then came a sharp downturn. Ant's IPO was postponed as a turning point. In 2021, the antitrust storm of the platform economy struck, Alibaba was fined 18.228 billion yuan, and its stock price retreated more than 60% from its peak—The most profound lesson from that round of decline was that the market had previously underpriced regulatory risks. From 2022 to 2023, the stock price repeatedly bottomed out in the $60 to $100 range.

From 2024 to 2025, the global AI boom ignited a new narrative, with MaaS from Tongyi Qianwen and Alibaba Cloud helping to recover valuations, with a 52-week high once reaching $192.67. But in 2026, this round of pullback pushed the stock back to $119.44, about 38% from the 52-week high, and less than 40% from the 2020 historical peak.

This time, the valuation suppression is no longer due to antitrust measures, but rather the combination of geopolitics and profit collapse. Looking at historical intervals, the room for further sharp declines may be limited, but what is needed for an upward breakout is substantial evidence such as capital expenditure peaking and cloud business profit margins recovering, not just another round of narrative.

⚠️ Risk Notice • If the 1260H military-related list lawsuit loses, its listing status and liquidity in the U.S. could deteriorate significantly • If capital expenditure remains high, free cash flow losses and dilution pressures for refinancing will recur • E-commerce groups grew only 4%, EBITA slightly declined, and the erosion between Pinduoduo and JD.com continues • The distillation allegations of Tongyi Qianwen Model carry risks of intellectual property litigation and narrowing international cooperation channels • Domestic regulatory policies such as data security and platform antitrust are still evolving, and compliance costs remain uncertain

🟡 Neutral Cloud growth and profit collapse are both real, and discounts have partially reflected risks

💬 Discussion The gambling game is not yet settled, so heavy positions are not advisable. Live buy and sell positions post BABA on the official WeChat account.

Data source

•	Source: NextPick real-time market snapshot + Alibaba June 2026 quarterly earnings report + SEC filing documents + mainstream financial media public reports, data reconciliation date 2026-08-25.