Alibaba (NYSE:BABA) shares fell around 4% in U.S. premarket trading on Thursday after the Chinese e-commerce and cloud computing group reported second-quarter earnings below market expectations, despite stronger revenue and rapid growth across its artificial intelligence cloud operations.
The company posted earnings per share of RMB8.52, falling short of the analyst consensus of RMB10.72. Quarterly revenue increased 9% year on year to RMB268.95 billion, narrowly exceeding expectations of RMB268.34 billion.
AI cloud revenue growth accelerates to 45%
Alibaba’s AI Cloud and Compute Services business remained a standout performer, generating RMB48.4 billion in revenue as year-on-year growth accelerated to 45%.
Demand for AI-related products continued to expand rapidly, with revenue from these offerings reaching RMB12.4 billion. This represented the twelfth consecutive quarter in which AI-related product revenue recorded triple-digit year-on-year growth.
“We delivered a strong quarter, driven by the improving commercialization of our full-stack AI capabilities,” said Eddie Wu, CEO of Alibaba Group. “Alibaba Cloud’s external revenue growth accelerated to 45%, with AI-related product revenue delivering triple-digit growth for the twelfth consecutive quarter.
“Cloud segment revenue growth continued to accelerate, with quality earnings and operating leverage increasing EBITA margin to 12%,” said Toby Xu, chief financial officer at Alibaba.
The improvement in cloud profitability accompanied the faster revenue growth, highlighting increasing operating leverage as demand for Alibaba’s AI infrastructure and services expands.
China e-commerce revenue faces pressure
Performance across Alibaba’s domestic e-commerce operations was more mixed.
Customer management revenue declined 7% year on year to RMB89.12 billion. However, Alibaba said that excluding the contra-revenue impact associated with a new business development programme, customer management revenue would have increased 1% on a like-for-like basis.
Across the wider group, total e-commerce revenue increased 4% to RMB205.9 billion.
The figures suggest Alibaba’s core commerce operations are continuing to expand overall, although underlying trends remain uneven as the company invests in new initiatives and adapts its monetisation strategy.
Technology investment weighs on Alibaba margins
Higher investment contributed to a significant decline in group profitability during the quarter.
Adjusted EBITA dropped 30% year on year to RMB27.3 billion, while the adjusted EBITA margin contracted to 10% from 16% in the corresponding period last year.
Alibaba attributed much of the decline to increased technology investment. The impact was partially offset by stronger operating results from the cloud division and improved efficiency across other parts of the business.
The combination of accelerating AI cloud growth and resilient overall revenue provides evidence of progress in Alibaba’s technology strategy. However, Thursday’s negative share-price reaction indicates investors remain focused on the near-term cost of that investment, particularly after earnings came in substantially below expectations and group margins narrowed.
Alibaba Group Holdings stock price
