Will Heavy Capex Spending Weigh on Alibaba's AI Ambitions?

Alibaba Group BABA is doubling down on artificial intelligence, but the financial toll of its aggressive spending spree is raising uncomfortable questions about near-term profitability. The company reported non-GAAP earnings of 61 cents per ADS in the second quarter of fiscal 2026, which lagged the Zacks Consensus Estimate by 7.58%. In domestic currency, the company reported non-GAAP diluted earnings of RMB 4.36, down 71% year over year, even as revenues rose 5% to RMB 247.8 billion.

Capital expenditure surged 80% year over year to RMB 31.9 billion ($4.5 billion), dragging free cash flow into negative territory at an outflow of RMB 21.8 billion, a stark reversal from the RMB 13.7 billion inflow a year ago. Adjusted EBITDA cratered 78%, with the margin collapsing from 17.4% to 3.7%. While Cloud Intelligence revenues grew an impressive 34% and AI-related products posted triple-digit growth for the ninth straight quarter, these gains were overshadowed by the sheer scale of investment-led cash burn.

Alibaba's commitment to spending at least RMB 380 billion on AI and cloud over three years — already RMB 120 billion deep — continues to expand its footprint, from the recent open-source RynnBrain robotics model to integrating Qwen across Taobao, Alipay, and Fliggy. Yet with the correlation between capex and incremental revenues still undefined in this nascent AI cycle, investors may find Alibaba's spending trajectory more alarming than inspiring as the company heads into its next earnings report soon.

How Do Rivals Compare on AI Capex?

Alibaba is hardly alone in opening the spending floodgates. Amazon (AMZN has projected approximately $200 billion in capital expenditures for 2026, with the bulk directed toward Amazon Web Services' AI workloads, custom Trainium chips, and robotics. Amazon CEO Andy Jassy has expressed confidence in long-term returns but acknowledged that Amazon's free cash flow could turn negative this year under the weight of this investment. Google parent Alphabet GOOGL is scaling even more aggressively, guiding 2026 capex to $175-$185 billion — nearly double Google's $91.4 billion outlay in 2025. Unlike Alibaba, both Microsoft and Google are cushioning their spending with robust profitability; Microsoft posted 47% operating margins while Google delivered 48% cloud revenue growth and $34.5 billion in quarterly net income, providing financial firepower that Alibaba currently lacks.

BABA’s Share Price Performance, Valuation and Estimates

BABA shares have surged 29.5% in the past six-month period, outperforming the Zacks Internet – Commerce industry and the Zacks Retail-Wholesale sector’s decline of 9.1% and 0.7%, respectively.

BABA’s 6-Month Price Performance

From a valuation standpoint, BABA stock is currently trading at a forward 12-month price/sales ratio of 2.42X compared with the industry’s 1.91X. BABA has a Value Score of F.

BABA’s Valuation

The Zacks Consensus Estimate for fiscal 2026 earnings is pegged at $5.96 per share, implying a 33.85% year-over-year decline.

Alibaba Group Holding Limited Price and Consensus

Alibaba Group Holding Limited price-consensus-chart | Alibaba Group Holding Limited Quote

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).

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