Invest in Alibaba? 1 Green, 1 Red
Hello! Today, I've brought this topic to you! We're diving deep into one of China's former tech darlings, Alibaba (NYSE: BABA). Once the undisputed crown jewel of China's internet economy, Alibaba finds itself navigating a complex landscape of regulatory crackdowns, shifting consumer behaviors, and fierce competition. But beneath the surface, a quiet transformation is underway.
For investors considering Alibaba stock today, it's crucial to understand both its promising potential and its lingering challenges. Let's break down the one major "green flag" that signals long-term growth and the one "red flag" that still casts a shadow over its immediate future.
Alibaba is clearly no longer content with being just an e-commerce giant. Its most ambitious bet today is on becoming an artificial intelligence (AI)-native enterprise, and the very heart of this strategic shift lies within Alibaba Cloud.
Initially perceived as a lower-margin, China-centric hosting business, Alibaba Cloud has brilliantly repositioned itself around artificial intelligence. The core of this transition is its deep integration with Qwen, Alibaba's powerful open-source large language model (LLM). This integration significantly expands the platform's reach far beyond just basic cloud infrastructure.
And Qwen is no lightweight. The latest version, Qwen3, impressively rivals the performance of industry leaders like OpenAI's GPT-4 and Google's Gemini across several benchmark tasks. But the real strategic masterstroke is Alibaba Cloud's decision to make Qwen open-source. This invites developers and businesses worldwide to leverage its robust model to build their own innovative AI applications.
This open AI strategy positions Alibaba Cloud perfectly to expand its influence beyond China, particularly into emerging markets and Southeast Asia, where the dominance of U.S. tech giants might be less pronounced. As more and more developers build on Qwen, they naturally become integrated into and utilize other services offered by Alibaba. In essence, Alibaba Cloud is aiming to become a comprehensive, full-stack AI ecosystem for developers and businesses globally.
Beyond Qwen, Alibaba Cloud is also doubling down on its investment in core infrastructure, planning to pour approximately $50 billion into it over the next three years. This planned investment alone will exceed Alibaba's total AI and cloud spending over the past decade, truly demonstrating the company's unwavering commitment to becoming a leading AI cloud provider.
If this ambitious strategy proves successful, AI and cloud computing could very well become Alibaba's primary growth engine for the next decade, much like how Amazon Web Services (AWS) has been a crucial growth driver for Amazon.
While the promise of AI and cloud computing is exciting and captures significant investor attention, it's crucial to remember that Alibaba's core revenue still heavily relies on its domestic commerce segment. In fiscal year 2025 (ended March 31), this segment accounted for a substantial 45% of its total revenue and an even more striking 113% of its adjusted earnings before interest, taxes, and amortization (EBITA). This high EBITA percentage indicates that Alibaba's profits remain overwhelmingly dependent on its e-commerce operations, with other segments collectively recording a loss in 2024.
However, growth in this crucial segment has been notably sluggish. For the full fiscal year 2025, revenue from Taobao and Tmall grew by a mere 3%. This slow growth is largely attributed to soft consumer sentiment within China, a challenging economic backdrop, and ongoing geopolitical tensions that impact market confidence.
Adding to the pressure, Alibaba faces intense competition from fast-moving rivals. Pinduoduo has effectively leveraged a low-price strategy to capture market share, while Douyin (TikTok's Chinese version) is rapidly gaining ground through its short-video commerce model, fundamentally changing how consumers shop.
Alibaba has certainly attempted to respond, incorporating AI into its shopping experiences and intensifying efforts to reengage both merchants and users. Encouragingly, domestic e-commerce revenue did see an improvement, growing 9% year over year in the March 2025 quarter. This is a notable uptick from the full-year trend. If Alibaba can sustain this improved execution, it might be able to ride the tailwinds of a growing GDP per capita and an expanding retail industry in China.
Nevertheless, Alibaba still has a significant task ahead to prove it can maintain this momentum. The structural pressures—from fierce competition to evolving consumer behaviors—are deeply embedded and won't simply disappear overnight.
Q1. What is Alibaba's primary strategic focus for its next phase of growth, moving beyond traditional e-commerce?
A. Alibaba is making a significant bet on becoming an AI-native enterprise, with Alibaba Cloud and its open-source large language model, Qwen, at the core of this transformation. They are heavily investing in AI infrastructure and an open ecosystem.
Q2. What are the main factors contributing to the sluggish growth in Alibaba's core e-commerce business?
A. The core e-commerce segment is struggling due to soft consumer sentiment in China, a weak economic backdrop, geopolitical tensions, and intense competition from rivals like Pinduoduo (with its low-price strategy) and Douyin (with its short-video commerce model).
For investors seeking immediate, short-term upside, there might be "cleaner" growth stories elsewhere in the market. However, for those who are patient, willing to wait for the AI flywheel to truly turn, and who believe in Alibaba's capability to skillfully navigate China's evolving economic and competitive landscape, this could represent an underappreciated and compelling long-term opportunity. Regardless of your investment horizon, Alibaba certainly deserves a spot on your radar.