We use cookies to understand how you use our site and to improve your experience.
This includes personalizing content and advertising.
By pressing "Accept All" or closing out of this banner, you consent to the use of all cookies and similar technologies and the sharing of information they collect with third parties.
You can reject marketing cookies by pressing "Deny Optional," but we still use essential, performance, and functional cookies.
In addition, whether you "Accept All," Deny Optional," click the X or otherwise continue to use the site, you accept our Privacy Policy and Terms of Service, revised from time to time.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
BABA's Margins Suffer From Stiff Competition: Time to Sell the Stock?
Read MoreHide Full Article
Key Takeaways
BABA posted 5% revenue growth as non-GAAP earnings fell sharply, highlighting profitability pressures.
BABA more than doubled sales and marketing spend to defend share, fueling a 78% drop in adjusted EBITDA.
Alibaba's cloud unit grew fast, but its scale remains too small to offset margin damage in core e-commerce.
Alibaba Group Holding's (BABA - Free Report) second-quarter fiscal 2026 results have exposed troubling realities that suggest investors should reconsider their positions in 2026. Despite achieving modest revenue growth, the Chinese e-commerce giant is experiencing severe margin compression driven by relentless competitive pressures and aggressive capital deployment that shows limited near-term payoff potential.
The company reported revenues of RMB247.8 billion for the September quarter, representing just 5% year-over-year growth when including all operations. While management highlighted a 15% increase on a like-for-like basis, excluding divested businesses, the profitability picture paints a concerning narrative. Alibaba reported non-GAAP earnings of 61 cents per ADS in the second quarter of fiscal 2026, which lagged the Zacks Consensus Estimate by 7.58%. In domestic currency, the company reported non-GAAP diluted earnings of RMB 4.36, down 71% year over year.
The margin deterioration stems primarily from what industry observers call "involution"—hyper-competition where companies work harder for diminishing returns. Alibaba's sales and marketing expenses more than doubled to RMB66 billion during the quarter as management attempts to defend market share against formidable rivals, including JD.com, Pinduoduo, Meituan, and Douyin. This spending surge reflects the company's desperation to maintain relevance in quick commerce and food delivery segments, where it faces entrenched competitors with superior unit economics.
The Zacks Consensus Estimate for fiscal 2026 earnings is pegged at $5.98 per share, implying a 33.63% year-over-year decline.
Profitability Sacrificed for Questionable Growth Initiatives
Perhaps most alarming is the 78% decline in adjusted EBITDA, driven largely by strategic investments in the Quick Commerce business that continue bleeding cash. Management disclosed improving unit economics for quick commerce, with per-order losses reduced by 50% since mid-2025. However, these incremental improvements pale against the massive capital requirements needed to compete effectively. The company allocated approximately RMB120 billion toward AI and cloud infrastructure over the past four quarters, representing aggressive spending that strains profitability without clear return timelines.
Management's forward-looking guidance offers little comfort for margin-focused investors. Leadership emphasized continued prioritization of AI infrastructure deployment and user acquisition over near-term profitability improvements, explicitly stating their focus remains on enhancing user experience and converting new users rather than controlling subsidy approaches. This strategic direction signals prolonged margin pressure extending well into fiscal 2026 and beyond.
The food delivery war intensified throughout late 2025, with JD.com's aggressive entry into the delivery space through JD Takeaway sparking subsidized pricing battles with Alibaba's Ele.me platform. This competitive dynamic shows no signs of abating, suggesting margin recovery remains distant.
Cloud Growth Insufficient to Offset Core Weakness
While Cloud Intelligence Group revenues surged 34% year over year to RMB39.8 billion, with AI-related products maintaining triple-digit growth for the ninth consecutive quarter, this segment remains too small to offset deterioration in core e-commerce margins. Management acknowledged supply chain constraints limiting AI infrastructure deployment pace, indicating that even this bright spot faces execution headwinds. Furthermore, the correlation between massive capital expenditures and incremental cloud revenues remains unstable due to the early development stage, creating uncertainty around return on invested capital.
Management's refusal to provide specific fiscal 2026 revenue or margin guidance reflects competitive uncertainty and unclear investment returns. Recent developments confirm competitive pressures remain intense across all segments. The company continues facing aggressive competition from price-focused platforms like Pinduoduo, which leverages its Consumer-to-Manufacturer model to offer ultra-low prices, and from JD.com's superior logistics capabilities. The competitive landscape has only intensified, with each major platform engaging in subsidy wars that erode profitability industry-wide.
Valuation and Competitive Landscape Concerns
Alibaba's forward 12-month price-to-sales ratio of 2.61 times now trades at a notable premium compared to the broader Zacks Internet-Commerce industry average of 2.25 times, suggesting limited valuation support despite deteriorating fundamentals. The stock's relative valuation demands that investors pay above-market multiples for a business experiencing severe margin compression, negative free cash flow generation, and intensifying competitive pressures in its core Chinese market.
BABA’s P/S Ratio Reflects Premium Valuation
Image Source: Zacks Investment Research
The stock's 1% return over the past three months stands in stark contrast to the performance of global technology peers and the Zacks Retail-Wholesale sector, reflecting investor recognition of these challenges.
When compared against global technology leaders, Alibaba's competitive position appears increasingly precarious. Amazon (AMZN - Free Report) maintains a dominant market share in Western e-commerce while its AWS cloud business delivers consistent profitability. Amazon's operational excellence and logistics infrastructure set standards that Alibaba struggles to match domestically. Microsoft (MSFT - Free Report) continues expanding its Azure cloud platform with superior margins, while Microsoft's enterprise software ecosystem provides recurring revenue streams absent from Alibaba's portfolio. Microsoft's disciplined capital allocation contrasts sharply with Alibaba's aggressive cash burn. Alphabet (GOOGL - Free Report) leverages its Google Cloud platform alongside advertising dominance, maintaining profitability while investing in AI infrastructure. Alphabet's search advertising moat provides sustainable cash generation that funds growth initiatives without sacrificing margins. Amazon, Microsoft, and Alphabet each demonstrate superior ability to monetize AI investments while maintaining operational discipline — capabilities Alibaba has yet to prove it possesses in its intensely competitive domestic market.
BABA Lags Peers, Sector in 3 Months
Image Source: Zacks Investment Research
Conclusion
For investors seeking exposure to Chinese e-commerce or cloud computing growth, Alibaba's combination of margin compression, unclear profitability timelines, and intensifying competitive pressures suggests the risk-reward profile has turned decidedly unfavorable heading into 2026. BABA stock currently has a Zacks Rank #5 (Strong Sell).
Image: Bigstock
BABA's Margins Suffer From Stiff Competition: Time to Sell the Stock?
Key Takeaways
Alibaba Group Holding's (BABA - Free Report) second-quarter fiscal 2026 results have exposed troubling realities that suggest investors should reconsider their positions in 2026. Despite achieving modest revenue growth, the Chinese e-commerce giant is experiencing severe margin compression driven by relentless competitive pressures and aggressive capital deployment that shows limited near-term payoff potential.
The company reported revenues of RMB247.8 billion for the September quarter, representing just 5% year-over-year growth when including all operations. While management highlighted a 15% increase on a like-for-like basis, excluding divested businesses, the profitability picture paints a concerning narrative. Alibaba reported non-GAAP earnings of 61 cents per ADS in the second quarter of fiscal 2026, which lagged the Zacks Consensus Estimate by 7.58%. In domestic currency, the company reported non-GAAP diluted earnings of RMB 4.36, down 71% year over year.
The margin deterioration stems primarily from what industry observers call "involution"—hyper-competition where companies work harder for diminishing returns. Alibaba's sales and marketing expenses more than doubled to RMB66 billion during the quarter as management attempts to defend market share against formidable rivals, including JD.com, Pinduoduo, Meituan, and Douyin. This spending surge reflects the company's desperation to maintain relevance in quick commerce and food delivery segments, where it faces entrenched competitors with superior unit economics.
The Zacks Consensus Estimate for fiscal 2026 earnings is pegged at $5.98 per share, implying a 33.63% year-over-year decline.
Alibaba Group Holding Limited Price and Consensus
Alibaba Group Holding Limited price-consensus-chart | Alibaba Group Holding Limited Quote
Profitability Sacrificed for Questionable Growth Initiatives
Perhaps most alarming is the 78% decline in adjusted EBITDA, driven largely by strategic investments in the Quick Commerce business that continue bleeding cash. Management disclosed improving unit economics for quick commerce, with per-order losses reduced by 50% since mid-2025. However, these incremental improvements pale against the massive capital requirements needed to compete effectively. The company allocated approximately RMB120 billion toward AI and cloud infrastructure over the past four quarters, representing aggressive spending that strains profitability without clear return timelines.
Management's forward-looking guidance offers little comfort for margin-focused investors. Leadership emphasized continued prioritization of AI infrastructure deployment and user acquisition over near-term profitability improvements, explicitly stating their focus remains on enhancing user experience and converting new users rather than controlling subsidy approaches. This strategic direction signals prolonged margin pressure extending well into fiscal 2026 and beyond.
The food delivery war intensified throughout late 2025, with JD.com's aggressive entry into the delivery space through JD Takeaway sparking subsidized pricing battles with Alibaba's Ele.me platform. This competitive dynamic shows no signs of abating, suggesting margin recovery remains distant.
Cloud Growth Insufficient to Offset Core Weakness
While Cloud Intelligence Group revenues surged 34% year over year to RMB39.8 billion, with AI-related products maintaining triple-digit growth for the ninth consecutive quarter, this segment remains too small to offset deterioration in core e-commerce margins. Management acknowledged supply chain constraints limiting AI infrastructure deployment pace, indicating that even this bright spot faces execution headwinds. Furthermore, the correlation between massive capital expenditures and incremental cloud revenues remains unstable due to the early development stage, creating uncertainty around return on invested capital.
Management's refusal to provide specific fiscal 2026 revenue or margin guidance reflects competitive uncertainty and unclear investment returns. Recent developments confirm competitive pressures remain intense across all segments. The company continues facing aggressive competition from price-focused platforms like Pinduoduo, which leverages its Consumer-to-Manufacturer model to offer ultra-low prices, and from JD.com's superior logistics capabilities. The competitive landscape has only intensified, with each major platform engaging in subsidy wars that erode profitability industry-wide.
Valuation and Competitive Landscape Concerns
Alibaba's forward 12-month price-to-sales ratio of 2.61 times now trades at a notable premium compared to the broader Zacks Internet-Commerce industry average of 2.25 times, suggesting limited valuation support despite deteriorating fundamentals. The stock's relative valuation demands that investors pay above-market multiples for a business experiencing severe margin compression, negative free cash flow generation, and intensifying competitive pressures in its core Chinese market.
BABA’s P/S Ratio Reflects Premium Valuation
Image Source: Zacks Investment Research
The stock's 1% return over the past three months stands in stark contrast to the performance of global technology peers and the Zacks Retail-Wholesale sector, reflecting investor recognition of these challenges.
When compared against global technology leaders, Alibaba's competitive position appears increasingly precarious. Amazon (AMZN - Free Report) maintains a dominant market share in Western e-commerce while its AWS cloud business delivers consistent profitability. Amazon's operational excellence and logistics infrastructure set standards that Alibaba struggles to match domestically. Microsoft (MSFT - Free Report) continues expanding its Azure cloud platform with superior margins, while Microsoft's enterprise software ecosystem provides recurring revenue streams absent from Alibaba's portfolio. Microsoft's disciplined capital allocation contrasts sharply with Alibaba's aggressive cash burn. Alphabet (GOOGL - Free Report) leverages its Google Cloud platform alongside advertising dominance, maintaining profitability while investing in AI infrastructure. Alphabet's search advertising moat provides sustainable cash generation that funds growth initiatives without sacrificing margins. Amazon, Microsoft, and Alphabet each demonstrate superior ability to monetize AI investments while maintaining operational discipline — capabilities Alibaba has yet to prove it possesses in its intensely competitive domestic market.
BABA Lags Peers, Sector in 3 Months
Image Source: Zacks Investment Research
Conclusion
For investors seeking exposure to Chinese e-commerce or cloud computing growth, Alibaba's combination of margin compression, unclear profitability timelines, and intensifying competitive pressures suggests the risk-reward profile has turned decidedly unfavorable heading into 2026. BABA stock currently has a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.