Alibaba Shares Rise on AI Strength. Can the Stock's Momentum Continue?

Key Points

• Alibaba saw accelerating cloud computing growth and continued signs of an e-commerce turnaround.

• However, heavy investments in quick commerce weighed on its overall profitability.

• The stock still looks attractively valued even after its recent run.

• 10 stocks we like better than Alibaba Group ›

Alibaba (NYSE: BABA) shares jumped after the Chinese company continued to show signs of a turnaround, led by strong growth in its e-commerce and cloud computing segments. The stock is now up nearly 60% on the year, as of this writing.

Let's take a closer look at Alibaba's most recent earnings and future prospects to see if the stock can continue its momentum.

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AI excitement

Alibaba's cloud computing business grabbed headlines, as revenue growth accelerated to 26% in the quarter to come in at nearly $4.7 billion. The growth was driven by artificial intelligence (AI), with AI product revenue more than doubling for the eighth straight quarter. The segment's adjusted EBITA (earnings before interest, taxes, and amortization), meanwhile, also climbed 26% to $412 million.

The company highlighted a new partnership with SAP, where SAP customers will be able to run their systems on Alibaba's infrastructure. It is also currently developing a new AI chip specifically designed for inference. Alibaba plans to invest a whopping $53 billion in AI over the next three years.

While its AI efforts were in focus, the company's e-commerce business remains its largest business. This is in contrast to its American counterpart, Amazon, whose Amazon Web Services (AWS) has become its largest business by profitability. Alibaba's two main e-commerce platforms are Tmall, which is similar to Amazon's marketplace business, and Taobao, which is like eBay without the auction format.

Alibaba's e-commerce business has been under pressure for the past few years due to increasing competition and a weak Chinese consumer. However, the company invested aggressively to help grow its gross merchandise value (GMV), and then added a new software service fee and AI marketing tool, Quanzhantui, to drive revenue and profit growth.

This paid off in the quarter, with its e-commerce segment growing its revenue 10% year over year to $19.6 billion. Its third-party business revenue also rose 10%, while its quick-commerce revenue climbed 13%. However, its investment in quick commerce weighed on profitability, with segment EBITA sinking 21% to $5.4 billion. Its 88VIP premium memberships once again increased by double digits, topping 53 million members.

Alibaba is making a big investment in quick commerce, or "instant commerce," where buyers can get an item from its Taobao platform delivered in an hour or less. Monthly active users for the segment have already reached 300 million, up 200% since April. It said the introduction of the service drove a 20% increase in Tabao daily users and led to a big increase in average purchase per user. It's now also transitioning its Tmall Supermarket business to a quick commerce model.

The company's international commerce segment (AIDC), which includes AliExpress, also had a strong quarter. Revenue jumped 19% to $4.9 billion. Importantly, its segment EBITA came in at negative $8 million, which is a huge improvement over the much larger losses it had been experiencing in past quarters.

Overall, Alibaba's revenue increased 2% to $34.6 billion, but was up 10% after excluding dispositions. Adjusted EBITA fell 14% to $5.4 billion, while its adjusted earnings per American depositary share (ADS) dropped 10% to $2.06.

Its operating cash flow fell 39% to $2.9 billion, while its free cash flow was an outflow of $2.6 billion as it invested heavily in data center infrastructure.

Alibaba ended the quarter with $52.3 billion in cash and short-term investments and $32.3 billion in debt. It also had $51 billion in equity and other investments on its balance sheet.

Is the stock still a buy?

While its overall numbers were nothing to write home about, Alibaba's strong e-commerce and cloud computing revenue momentum got investors excited. The company is clearly becoming one of the leaders in Chinese AI, and the introduction of a new AI chip for inference could help cement its status even further.

While its e-commerce business is starting to regain traction, the company is also investing heavily back into the business to capture a growing quick-commerce opportunity. While this will weigh on profitability, if it can drive long-term growth and give the company an edge in the competitive Chinese e-commerce landscape, it will be the right move. Meanwhile, its AIDC business made big strides toward profitability in the quarter, which should bode well for future profitability growth.

Turning to valuation, the stock trades at a forward price-to-earnings (P/E) ratio of about 13 times fiscal 2026 analyst estimates. That's still pretty inexpensive despite the stock's strong performance this year.

Given Alibaba's growing AI momentum, e-commerce turnaround, quick commerce investments, and AIDC profitability improvements, I think the stock still looks like a solid buy at its current valuation.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and eBay. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.