Heavy AI Spending Weighs on Alibaba’s Profits: Hold or Fold the Stock?
Alibaba Group BABA has staked its future on artificial intelligence (AI), channeling billions into cloud infrastructure, proprietary chip development and the relentless rollout of frontier large language models. Yet the deeper the company wades into this spending cycle, the worse its financials appear. What was once a reliably profitable e-commerce giant now resembles a company sacrificing present earnings for a future that may take years to materialize.
As profitability crumbles and free cash flow dries up under the weight of unprecedented capital expenditure, BABA is beginning to look like a stock investors would be wise to exit or avoid altogether in 2026.
BABA’s Profits Take a Severe Hit
Alibaba’s fiscal third-quarter 2026 results made clear just how painful this investment cycle has become. Total revenues grew a tepid 2% year over year to RMB 284.8 billion ($41.3 billion), or 9% on a like-for-like basis excluding divested businesses.
However, profitability deteriorated sharply across every meaningful metric. Operating profit plunged 74% year over year to RMB 10.6 billion, non-GAAP net profit tumbled 67% to RMB 16.7 billion, and adjusted EBITA declined 57% to RMB 23.4 billion. Free cash flow collapsed 71%, shrinking to just RMB 1.1 billion from RMB 3.9 billion in the year-ago period. Alibaba attributed the decline primarily to surging capital expenditure on cloud infrastructure and aggressive spending in quick commerce.
Over the past four quarters alone, the company deployed approximately RMB 120 billion in AI and cloud infrastructure investment. While Cloud Intelligence Group revenues surged 36% to RMB 43.3 billion and AI-related products maintained triple-digit revenue growth for the 10th consecutive quarter, those top-line gains remain wholly insufficient to absorb the crushing weight of Alibaba’s accelerating capital outlays.
BABA’s Forward Guidance Provides Little Comfort
Investors hoping that Alibaba’s fiscal third-quarter 2026earnings callwould signal a swift financial recovery were left largely disappointed. Management acknowledged that server deployment continues to lag behind surging AI infrastructure orders, implying that capital expenditure pressures are unlikely to ease meaningfully in the coming quarters.
On the quick commerce front, Alibaba guided that the segment would achieve positive cash flow at scale only by fiscal 2028, with overall profitability pushed out even further to fiscal 2029 — timelines that stretch investor patience well past any reasonable near-term horizon.
On the cloud side, management projected that its MaaS offering would eventually become the Cloud Intelligence Group’s largest revenue product, but provided no binding financial milestones or timelines to lend that ambition credibility. The Zacks Consensus Estimate for Alibaba’s fiscal 2026 earnings stands at $5.26 per share, implying a steep 41.62% year-over-year decline.
Alibaba Group Holding Limited Price and Consensus
Alibaba Group Holding Limited price-consensus-chart | Alibaba Group Holding Limited Quote
BABA’s Relentless and Costly AI Push
Alibaba’s AI ambitions are nothing if not audacious. The company has committed to deploying at least RMB 380 billion ($53 billion) over the next three years in AI and cloud infrastructure — an amount that surpasses its total AI and cloud spending over the prior decade combined. Simultaneously, Alibaba has maintained a relentless pace of new product releases.
In February 2026, the company launched Qwen3.5, a 397-billion-parameter multimodal open-weight model with native agentic capabilities and support for more than 200 languages. In March 2026, Alibaba Cloud published a portfolio of enterprise customer success stories, demonstrating how its full-stack AI and cloud capabilities are being deployed across global industries, though the underlying economics remain under pressure. Last week, the company unveiled Qwen3.6-Plus, a new large language model targeting advanced agentic coding and multimodal reasoning, integrated into its Wukong enterprise platform and the Qwen App.Â
The Qwen App crossed 300 million monthly active users as of February 2026. Alibaba also restructured its AI operations under the newly formed Alibaba Token Hub (ATH) business group, consolidating Tongyi Lab, MaaS, and the Qwen and Wukong units under a single commercialization mandate. For investors, each successive model release signals not a narrowing of investment costs, but a further deepening of them.
Share Price Underperforms; Competition Closes In
BABA shares have plunged 32.7% in the past six-month period, underperforming the Zacks Retail-Wholesale sector’s decline of 3.9% — a gap that reflects not merely broader market turbulence but investor-specific skepticism about Alibaba’s near-term earnings trajectory. Rather than benefiting from the AI tailwind, BABA has been weighed down by its earnings misses, leadership instability and the market’s growing impatience with a turnaround story that has yet to deliver convincing profitability improvement.
On the competitive front, Alibaba Cloud faces formidable rivals. Amazon AMZN-owned Amazon Web Services, Microsoft MSFT Azure, and Alphabet GOOGL-owned Google Cloud command larger infrastructure footprints and deeper enterprise relationships. All three have aggressively expanded AI-native portfolios, but Microsoft’s OpenAI partnership gives it a compelling enterprise AI narrative. In Asia-Pacific, both Amazon and Google are accelerating regional investments, squeezing Alibaba’s standing. With Amazon, Microsoft and Google all committing extraordinary capital to consolidate their respective leads, BABA’s path to meaningful global cloud market share gains remains uncertain.
BABA’s 6-Month Price Performance
Image Source: Zacks Investment Research
Alibaba trades at a trailing 12-month EV/EBITDA ratio of 15.19X, a notable premium to the Zacks Internet – Commerce industry’s 10.3X, hard to justify given contracting earnings. BABA carries a Value Score of D.
BABA’s Premium Valuation Creates Skepticism
Image Source: Zacks Investment Research
Conclusion
With earnings eroding at a glacial pace, capital deployment accelerating, and free cash flow deeply suppressed, the fundamental near-term outlook for BABA in 2026 is deeply discouraging, making a strong case for investors to fold or stay away from the stock. Alibaba currently has a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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