Financial Report: AI Burns Cash! Alibaba's Quarterly Profit Plunges Nearly 80%, ADR Drops 4% Pre-Market

Chinese e-commerce giant Alibaba (BABA-US) (09988-HK) released its first-quarter financial results on Thursday, June 20, for the fiscal year ending June. Net profit fell more than 75% year-on-year to RMB 10.54 billion (approximately $1.57 billion), significantly below the RMB 21.8 billion forecast by analysts surveyed by FactSet. The company's American Depositary Receipts (ADRs) dropped as much as 4% in pre-market trading before narrowing losses to 3.1%.

Alibaba's revenue for the quarter rose 9% year-on-year to RMB 268.95 billion, slightly exceeding LSEG's estimate of RMB 268.88 billion. While AI-driven demand has accelerated growth in its cloud business, heavy investments in chips, data centers, and computing equipment continue to erode profits, resulting in over $6.6 billion in negative free cash flow this quarter.

Soaring AI Spending Erodes Profits

Capital expenditures for the quarter surged 75% year-on-year to RMB 67.7 billion (approximately $10 billion), primarily driven by uneven customer procurement timing, increased CPU computing capacity, and rising prices for various chip components. As the global AI race intensifies, escalating computing power and hardware costs have become a shared challenge across the technology industry.

CEO Eddie Wu previously stated that the company prioritizes AI growth over short-term profitability, and future investment may exceed the originally announced three-year budget of RMB 380 billion. The goal is to expand cloud and AI revenue fivefold to $100 billion within five years.

Alibaba continues to divest non-core assets to fund AI investments. Earlier this month, the company agreed to sell its gaming business, Lingxi Interactive, for at least $1.5 billion. Over the past two years, Alibaba has systematically exited several non-core businesses and consolidated most of its AI research and product teams into a new unit, Alibaba Token Hub, directly led by CEO Wu.

Cloud Revenue Emerges as Key Bright Spot

Cloud revenue for the quarter jumped 45% year-on-year to RMB 48.4 billion, with AI-related product revenue achieving triple-digit growth for the 12th consecutive quarter. Wu said Alibaba's comprehensive AI technology layout gives it an advantage in capturing rapidly expanding AI and AI computing demand.

Alibaba recently launched its flagship model, Qwen 3.8-Max, claiming its performance matches or even surpasses Anthropic's Fable 5 in certain benchmarks. The company also released Qwen 3.8-27B, capable of running directly on consumer hardware like laptops, targeting programmers, professionals, researchers, and long-duration AI agent tasks.

However, Chinese AI model providers generally compete for users through free or low-cost offerings, and investors are increasingly questioning whether massive spending can translate into actual revenue. Alibaba is acquiring paying subscribers through programming and AI agent platforms and launching an integrated Qwen app combining shopping and payment features to compete with ByteDance's Doubao and Tencent's WeChat, which is set to launch its own AI agent soon.

Alibaba's ADR has fallen 12% year-to-date as of Wednesday's close. Analysts believe that for the company to prove itself a winner in the AI industry, it must not only sustain high-speed growth in its cloud business but also reduce losses in its instant retail segment and demonstrate to shareholders that record-level capital expenditures will eventually yield returns.