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Will Rising Capex Pressure Hurt Alibaba's Margin and AI Strategy?
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Key Takeaways
BABA plans RMB 380B in AI and cloud capex over three years, pressuring margins and free cash flow.
Alibaba sees 10% fiscal 2026 CMR growth, but cloud adjusted EBITA margins stay in the high single digits.
BABA's AI products drive 20% of cloud revenues, yet utilization and quick commerce losses weigh on profits.
Alibaba Group Holding's (BABA - Free Report) ambitious infrastructure expansion threatens to further erode profitability as the company locks in RMB 380 billion in capital commitments over the next three years for AI and cloud development. Management's forward guidance signals continued margin compression with limited visibility on when massive technology investments will translate into sustainable returns.
The company projects customer management revenue (CMR) growth of 10% for fiscal 2026, driven by software service fees and increased penetration of its Quanzhantui advertising tool. However, this modest top-line improvement masks troubling profitability trends ahead. Cloud Intelligence Group’s adjusted EBITA margins are expected to remain stuck at high single digits through fiscal 2026, as lower utilization rates offset any benefits from higher-margin AI product adoption.
Management's reluctance to guide accelerated cloud revenue growth beyond the 26% to 34% range already achieved raises red flags about supply constraints and competitive headwinds. While AI-related products delivered triple-digit growth for nine consecutive quarters through September 2025, accounting for more than 20% of cloud revenues from external customers, the company faces mounting execution risks in converting this momentum into profitability.
The Alibaba International Digital Commerce segment remains another cash drain. Despite management's stated aim to reach profitability, the division still posted a negative 0.2% adjusted EBITA loss margin in the June 2025 quarter. Quick commerce operations continue bleeding money as the company prioritizes user acquisition over unit economics, with monthly active consumers approaching 300 million but no clear timeline for breakeven.
Free cash flow is expected to remain negative for the coming quarters as the company continues aggressive data center expansion and quick commerce subsidies, leaving investors questioning whether AI monetization can ultimately justify the enormous capital intensity weighing on Alibaba's profitability trajectory.
Tencent Holdings (TCEHY - Free Report) and Baidu (BIDU - Free Report) demonstrate contrasting approaches to balancing AI investment with profitability preservation. Tencent reported third-quarter 2025 capital expenditure declining 24% year over year to RMB 13 billion while expanding operating margins to 38%, benefiting from GPU supply constraints that enforced spending discipline. Conversely, Baidu reported negative free cash flow and a 61% operating loss margin in the third quarter after recording a RMB 16.2 billion asset impairment. While Tencent maintained a stable free cash flow of RMB 58.5 billion, Baidu's aggressive capex strategy continues to compress profitability despite 21% AI Cloud revenue growth, highlighting divergent capital allocation philosophies among Chinese technology competitors navigating the AI infrastructure buildout.
BABA’s Share Price Performance, Valuation and Estimates
BABA shares have surged 34.3% in the past six-month period, outperforming the Zacks Internet – Commerce industry and the Zacks Retail-Wholesale sector’s growth of 5.5% and 6.3%, respectively.
BABA’s 6-Month Price Performance
Image Source: Zacks Investment Research
From a valuation standpoint, BABA stock is currently trading at a forward 12-month price/sales ratio of 2.35X compared with the industry’s 2.11X. BABA has a Value Score of D.
BABA’s Valuation
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for fiscal 2026 earnings is pegged at $6.48 per share, implying a 28.08% year-over-year decline.
Image: Bigstock
Will Rising Capex Pressure Hurt Alibaba's Margin and AI Strategy?
Key Takeaways
Alibaba Group Holding's (BABA - Free Report) ambitious infrastructure expansion threatens to further erode profitability as the company locks in RMB 380 billion in capital commitments over the next three years for AI and cloud development. Management's forward guidance signals continued margin compression with limited visibility on when massive technology investments will translate into sustainable returns.
The company projects customer management revenue (CMR) growth of 10% for fiscal 2026, driven by software service fees and increased penetration of its Quanzhantui advertising tool. However, this modest top-line improvement masks troubling profitability trends ahead. Cloud Intelligence Group’s adjusted EBITA margins are expected to remain stuck at high single digits through fiscal 2026, as lower utilization rates offset any benefits from higher-margin AI product adoption.
Management's reluctance to guide accelerated cloud revenue growth beyond the 26% to 34% range already achieved raises red flags about supply constraints and competitive headwinds. While AI-related products delivered triple-digit growth for nine consecutive quarters through September 2025, accounting for more than 20% of cloud revenues from external customers, the company faces mounting execution risks in converting this momentum into profitability.
The Alibaba International Digital Commerce segment remains another cash drain. Despite management's stated aim to reach profitability, the division still posted a negative 0.2% adjusted EBITA loss margin in the June 2025 quarter. Quick commerce operations continue bleeding money as the company prioritizes user acquisition over unit economics, with monthly active consumers approaching 300 million but no clear timeline for breakeven.
Free cash flow is expected to remain negative for the coming quarters as the company continues aggressive data center expansion and quick commerce subsidies, leaving investors questioning whether AI monetization can ultimately justify the enormous capital intensity weighing on Alibaba's profitability trajectory.
Rivals Navigate Capex-Margin Trade-Offs Differently
Tencent Holdings (TCEHY - Free Report) and Baidu (BIDU - Free Report) demonstrate contrasting approaches to balancing AI investment with profitability preservation. Tencent reported third-quarter 2025 capital expenditure declining 24% year over year to RMB 13 billion while expanding operating margins to 38%, benefiting from GPU supply constraints that enforced spending discipline. Conversely, Baidu reported negative free cash flow and a 61% operating loss margin in the third quarter after recording a RMB 16.2 billion asset impairment. While Tencent maintained a stable free cash flow of RMB 58.5 billion, Baidu's aggressive capex strategy continues to compress profitability despite 21% AI Cloud revenue growth, highlighting divergent capital allocation philosophies among Chinese technology competitors navigating the AI infrastructure buildout.
BABA’s Share Price Performance, Valuation and Estimates
BABA shares have surged 34.3% in the past six-month period, outperforming the Zacks Internet – Commerce industry and the Zacks Retail-Wholesale sector’s growth of 5.5% and 6.3%, respectively.
BABA’s 6-Month Price Performance
Image Source: Zacks Investment Research
From a valuation standpoint, BABA stock is currently trading at a forward 12-month price/sales ratio of 2.35X compared with the industry’s 2.11X. BABA has a Value Score of D.
BABA’s Valuation
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for fiscal 2026 earnings is pegged at $6.48 per share, implying a 28.08% 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.