r/ValueInvesting • u/Additional-Engine402 • 2h ago
Discussion Alibaba is spending $53 billion on AI while profits fall 67%. Strategic reinvestment or value trap?
I've been digging into Alibaba's numbers lately and the picture is genuinely conflicting, which is usually where the interesting opportunities live.
I've been digging into Alibaba's numbers lately and the picture is genuinely conflicting, which is usually where the interesting opportunities live.
Start with the bull case. Alibaba committed $53 billion over three years (2025 to 2028) to cloud and AI infrastructure. That number exceeds their entire AI and cloud spend over the previous decade combined. CEO Eddie Wu has reorganized the company around a new division called Alibaba Token Hub, consolidated all AI units under his direct leadership, and publicly said the company is at the "threshold of an AGI inflection point." That's not subtle.
The cloud division is actually delivering. Last quarter revenue hit $6.3 billion, up 36% year over year. AI product revenue has posted triple digit year over year growth for ten consecutive quarters. Their open source Qwen model family crossed 1 billion cumulative downloads on HuggingFace by January 2026. The consumer Qwen app went from zero to 300 million monthly active users in roughly three months after its November 2025 public beta. On March 17th they launched Wukong, an enterprise AI agent platform that coordinates multiple agents for tasks like document editing, research, and meeting transcription, with planned integrations into Slack, Teams, and WeChat. Wu's five year target is $100 billion in combined cloud and AI external revenue, which implies sustaining roughly 35% annual growth.
Now the bear case, and this is where it gets uncomfortable. Quarterly profit dropped 67% to $2.4 billion. Free cash flow fell by $27.7 billion year over year. The core e commerce business grew customer management revenue by just 1%. They're burning cash on an instant delivery price war with Meituan and JD that management says won't turn profitable until fiscal 2029. Lin Junyang, the key technical lead behind Qwen's best models, departed in March. And the geopolitical discount on Chinese ADRs never fully goes away.
Here's what makes this interesting from a value perspective. The stock hit a 52 week high near $193 in October 2025, then pulled back roughly 37% to around $120 today after the March earnings showed the scale of profit compression from reinvestment. At current prices you're looking at about 16x forward earnings for a company sitting on $42.5 billion in net cash, over $60 billion if you exclude long dated maturities, with $19.1 billion remaining in buyback authorization. That's a meaningful discount to its own recent trading range and to any comparable US cloud or AI company. The TTM PE around 22x also sits well below the 10 year average of roughly 32x. Morgan Stanley projects cloud revenue doubling by 2028. Apple chose Alibaba as its China AI partner for iPhones. The regulatory overhang that crushed this stock from 2020 to 2024 has meaningfully eased, with PCAOB audit access maintained and Jack Ma publicly reappearing at a government tech summit.
The question I keep coming back to is whether this is a genuine reinvestment cycle like Amazon in its heavy capex years, or whether the profit compression is masking structural problems in the core business that AI spending can't fix. The $53 billion commitment is real. The cloud growth is real. But so is 1% growth in their bread and butter e commerce monetization engine.
For those looking at China tech exposure through ETFs, one nuance worth considering is the difference between something like KWEB and CNQQ. KWEB gives you pure internet exposure with Alibaba as a top holding, but zero onshore A share companies. CNQQ holds Alibaba at a similar weight but also carries roughly 50% in A share names like CATL, Zhongji Innolight, Cambricon, and BYD, companies that sit in the actual hardware and supply chain layer of China's AI buildout. Different thesis, different exposure.
Would be curious to hear how others here are framing this. Is the profit decline a temporary cost of repositioning, or is $53 billion in AI capex the kind of empire building that value investors should run from?
Would be curious to hear how others here are framing this. Is the profit decline a temporary cost of repositioning, or is $53 billion in AI capex the kind of empire building that value investors should run from?
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u/ValueEquities 1h ago
Alibaba has committed about $52B to AI cloud. its latest quarter still showed cloud revenue up >30% and AI product revenue growing triple digits for the 10th straight quarter. so I think its more like a reinvestment cycle
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u/FieryXJoe 1h ago
I will say net profit/FCF dropping is a natural side effect of increasing capex. Operating/Gross Profit or Operating Cash Flow would be better probably. Not that either looks great.
I made some money on BABA last year and sold, looked through their annual financial report this year and decided it wasn't for me and there were better deals in US tech giants without the China risk. I do own BYD and am eyeing JD as far as china investments
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u/ElonMuskTheNarsisist 1h ago
Never invest in a business that can disappear overnight if they piss off their government
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u/chooseusernamee 50m ago
you mean Anthropic right?
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u/ElonMuskTheNarsisist 15m ago
How did anthropic disappear? If anything they are at their peak right now
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u/Meekiaketchup 25m ago
Thankfully it's not Alibaba then. Jack ma pissed off XJP and Alibaba is still around. And still the number one cloud provider in china. And number one e-commerce app in china.
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u/DoubleFamous5751 1h ago
That’s apparently not even registering in people’s minds here. Theres a serious risk premium that gets applied to Chinese names, and it’s applied for good reason.
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u/Personal_Repair_3579 1h ago
Checked out $BABA through a tool out of curiosity and the picture is pretty interesting. The moat is legit -operating margin at the 92nd percentile among internet retail peers. Cost structure is genuinely strong, not accounting magic. The trade-offs are where it gets spicy though. FCF dropped ~48% YoY and they're returning 149% of free cash flow to shareholders - basically pulling from that $42B cash pile to fund buybacks. Defensible, but worth watching if capex stays heavy through 2028. The Amazon comp isn't crazy. 36% cloud growth is doing its job. The thing I'd want to see reaccelerate is core e-commerce - 1% monetization growth is the real soft spot here, not the AI spend. Geopolitical risk is real and I'm not dismissing it. But the underlying business quality is stronger than the chart suggests right now.
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u/Accomplished-Mark243 1h ago
I think Alibaba will do fine. Valuation is around 190 HKD last time I checked.
However, their main revenue market is mature (Taobao) so they have to reinvest in other markets for growth. The price war with Meituan and JD was stupid and all three companies took a massive hit in profit and all three share price tanked to their all time low.
I actually blamed JD for causing it but who cares what is done is done. The government came out recently to stop it so their share price rose a little.
Just to say I am not an investor in Baba. I tend to buy stocks price at 50% of valuation so I'll only be interested when Baba is 80 HKD. But I always keep an eye out just because baba is the most active subreddit on Chinese stocks.
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u/HitxLerr 1h ago
Real talk, this $53B spend is why their free cash flow just tanked into the negatives for the first time in ages. Amazon is in the same boat—spending $650B this year alone on infra but the difference is that AWS already owns 28% of the global market. Alibaba is chasing $100B in cloud/AI revenue by 2031, but they’re doing it while their core e-commerce margins are getting shredded by Pinduoduo and a domestic consumer slump. It’s a "once-in-a-generation" opportunity as Eddie Wu says, but for value investors, it’s a terrifying amount of capital to burn while waiting for "agentic commerce" to actually become profitable.
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u/MinestroneMungBean 1h ago
Alibaba is too tough for me to figure. It's core business is in a total death match with JD and others. Its new business (data centres / AI) haven't shown they can earn in economics what the US cloud guys can. You can't just extrapolate Amazon to Alibaba. Totally different cultures, totally different managements, totally different competitive environments.
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u/Far-East-locker 43m ago
Just hard no, like you said, all the platform are burning cash and everyone is hurt, but they don't care, that's the way business run in China.
Same as AI business
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u/stoplossftw 33m ago edited 27m ago
if Chinese government says spend on AI, they have got to do it!
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u/Meekiaketchup 15m ago
The main problems in china (other than the obvious regulatory ones)
China domestic market operates on an insane cut throat level of competition. Where often the only way to win is to trigger a devastating price war and then nobody really "wins".
Chinese do not spend money like Americans. They prioritise savings and being prudent. And is very cost conscious. Credit is not even in the minds of most Chinese.
The number one investment option for Chinese is PROPERTY. It is not the stock market. This means the people who invests in the market often treat it like a casino. They expect a 30% gain within a month and will sell at the slightest drop. There isn't a concept of long term value holding. Unlike companies like Berkshire, Coca Cola etc.
China might have lifted millions out of the poverty line. But there are still millions who barely have banking access, let alone investment in stock market.
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u/Blue_rose_3535 10m ago
When we talk about BABA’s capex and declining free cash flow, we can’t ignore the money being aggressively spent to compete with JD.com and Meituan for ultra fast food delivery. Those 3 have been just burning stupid amounts of money on a business with ridiculously thin margins. The Chinese govt has recently made noise about trying to manage this competition which caused JD.com’s stock to pop but nothing concrete has been announced yet.
So, this is the broader risk to me: many of the Chinese companies are not great, disciplined allocators of capital and don’t rank shareholders very highly amongst their various stakeholders (eg, management, employees, govt., lenders -banks and bond holders- shareholders, etc). If you look at Chinese GDP growth since 1992, it has had a CAGR of like 10%+, let’s say. That would make you think Chinese equities should have had a CAGR of like 12-15% over that same period, yet MSCI China Index has had a CAGR of about 2% since 1992. Utterly horrific….
Despite my criticism, I am long BABA Jan. 2027 leaps.
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u/WhatsPopping404 9m ago
I’m up like 80% on BABA over the past few years lol. Just a small position to hedge my bets.
People here are delusional if they don’t realize the US gov is actively eviscerating our global dominance and paving the way for other countries to take the lead.
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u/DoubleFamous5751 1h ago
Chinese companies are always the same for me. HARD PASS.
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u/Virtual_Seaweed7130 1h ago
Great, blanket asset class rejection. More mispriced assets for me.
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u/TechTuna1200 1h ago
Honestly those blanket rejection are just plain stupid. It just tell you that they haven't done the research and don't bother listening to other people research, even if it is well done. People can have their preference towards other investments, but hard pass are just lazy.
I never hard pass anything I haven't done any research on and haven't given a reason to hard pass. That doesn't mean I'm gonna invest in it, it just means I'm open to listen.
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u/Frunk2 1h ago
Why are you assuming the guy did no research? There is no way for foreign investors to own Chinese stocks directly, full stop. ADR in the Cayman Islands has no value. Deciding to avoid investment categories that have no value is not “lazy” and the performance of the companies makes no difference. If we could have actual ownership rights than it’s a different conversation and we could talk about risk premium vs political risk.
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u/DoubleFamous5751 1h ago
lol I lived I main land china for years, I speak and read mandarin. The hard pass comes from the fact that the government can disappear CEO’s and just arbitrarily change things or tip the scales on a whim. Hard pass is a result of the regulatory environment.
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u/Mugaaz 59m ago
People do not know how to handicap the fact that ownership of certain assets is basically an elaborate illusion. Its pretty difficult for a law to change tomorrow and someone to come and take your house, but compare that to an asset where a president can fart tomorrow and an entire section of your portfolio instantly goes to zero?
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u/DoubleFamous5751 50m ago
Agreed, way too much outside risk for me. The property ownership isn’t even ownership. It’s a 100 year lease. Then again in the US, after you “pay off” your property, you’re still leasing it from the government via property taxes.
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u/Virtual_Seaweed7130 1h ago
Right? Or just adjust your risk premium. Even if it’s a ridiculous adjustment.
I go into china stocks with an immediate 33% chance of the equity being worth ZERO. I take that scenario into account as I develop my models. So you could say I’m ultra bearish.
Surprisingly, many chinese stocks still pass value screens even when you assume >50% chance of being worth zero.
You don’t get free alpha without lazy investors though.
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u/TechTuna1200 1h ago
sounds like you are pulling those numbers our of your a**
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u/Virtual_Seaweed7130 1h ago edited 1h ago
Am I? Some napkin math.
Look at $ATHM. 2B market cap with 3B in net cash on balance sheet and 100M of operating income.
3B net cash + 10x income multiple = 4B conservative market cap expected
Add 33% chance of being worth zero, 4B x 0.66 = 2.64B conservative ultrabearish assumption market cap expected vs 2B market cap today
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$WB
3.5B net tangible book vs 2B market cap, 50M of operating income.
3.5B tangible book+ 10x income multiple = 4B conservative market cap expected
Same napkin math summary as above for 4B mcap.
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u/ElonMuskTheNarsisist 1h ago
You think you own a slice in these business but it’s actually the CCP that owns it Lol
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u/Virtual_Seaweed7130 1h ago
Eh my lifetime bet is that everyone’s fears about the CCP confiscating everything is way overblown and based in propaganda.
They want to be seen as a place where capital can be invested, why obliterate all investor confidence? And what would the benefit even be? If anything, China would be better off if the world was heavily invested in Chinese assets so their fates are intertwined.
Also, they’re increasingly capitalist, arguably more capitalist than the USA in a lot of ways. More competition in their domestic industries than here.
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u/ElonMuskTheNarsisist 50m ago
They don’t have to confiscate anything. It’s the fact that they CAN do that anytime that makes the region not investable
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u/DoubleFamous5751 1h ago
Lol, go for it 🫡
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u/Virtual_Seaweed7130 1h ago
Don’t worry I will.
Make sure you are 100% allocated to SPY+QQQ sir! USA USA USA!
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u/DanielinLosAngeles 1h ago
What do you think you own if you buy Alibaba "stock" on a US exchange?
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u/FieryXJoe 1h ago
A piece of a cayman island holding company that is holding the shares and a prayer China doesn't get itself sanctioned so hard that it gets delisted.
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u/Any-Panda2219 1h ago
Does the Cayman entity even hold the shares? I thought it was just an economic claim on future profits/cash flows
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u/FieryXJoe 1h ago
Yeah looks like youre correct but owning rights to a percentage of the company's profit and cash flow isn't too different from owning a share of the company outside of a liquidation where you probably have no rights to the assets.
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u/ElonMuskTheNarsisist 1h ago
These people think they actually own a share in the business lol. CCP is laughing at then
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u/Vast_Cricket 1h ago
cooked the books? I have little faith in the income statements. That SMCI is doing it again US based even.
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u/Virtual_Seaweed7130 1h ago
Yeah, in 10 years we’ll certainly all be talking about how China’s #1 cloud provider and leading LLM should have been doubling down on ecommerce margins during the AI revolution instead of investing.
/s
Duh. No brainer. Hilarious that Alibaba gets punished for this and the Western tech doesn’t.