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Alibaba Plunges 16.2% in 6 Months: 3 Key Reasons to Hold the Stock
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Key Takeaways
BABA's AI product sales marked a 12th straight quarter of triple-digit growth.
Alibaba's full-stack AI strategy spans chips, Qwen models and cloud infrastructure.
BABA's heavy AI spending pressured profits, but cash and liquid investments provides flexibility.
Alibaba (BABA - Free Report) shares have plunged 16.2% over the past six months compared with a 4.1% decline in the Zacks Retail-Wholesale sector as investors weighed the company's aggressive artificial intelligence (AI) spending against declining profitability. While concerns over margins are valid, Alibaba's fundamentals tell a more nuanced story.
Accelerating cloud growth, a deepening full-stack AI ecosystem and a resilient commerce business backed by a strong balance sheet suggest that existing investors should hold the stock, even as near-term headwinds argue for patience before adding fresh positions.
BABA’s 6-Months Performance
Image Source: Zacks Investment Research
AI Cloud Momentum Anchors the Growth Story
In the first quarter of fiscal 2027 (ended June 30, 2026), revenues from AI Cloud and Compute Services jumped 45% year over year to RMB48.44 billion (US$7.14 billion), with external customer revenues also accelerating to 45%, the fastest pace in 22 quarters. AI-related product revenues reached RMB12.38 billion (US$1.82 billion), marking the 12th consecutive quarter of triple-digit growth and accounting for 35% of external cloud revenues. Profitability is improving alongside scale, as the segment's adjusted EBITA surged 133% to RMB5.63 billion, lifting the EBITA margin to 12%. Alibaba also ranked first in China's AI cloud market with a 38.1% share.
Full-Stack AI Strategy Deepens Competitive Moat
Alibaba's tight integration of proprietary chips, models and applications remains a key differentiator. T-Head's Zhenwu chips now serve more than 650 external customers, while the company opened the weights of its 2.4-trillion-parameter Qwen3.8-Max flagship model in August. At the Apsara Conference held in September 2026, Alibaba revealed that Qwen 4 is in training, with the Qwen 4.5 and Qwen 5 series projected to scale to 5-10 trillion parameters. T-Head unveiled the Zhenwu V900 AI processor, offering triple its predecessor's performance, with mass production slated for first-quarter 2027, alongside Yitian 720 and Yitian 730 CPUs for agentic workloads launching in 2027. Alibaba Cloud also plans its first regions in Türkiye, Finland and the Netherlands over the next 12 months, and launched Qwen Intelligence, an agent platform for smartphone makers.
Commerce Resilience and Strong Balance Sheet Provide Cushion
Alibaba E-commerce Group's adjusted EBITA held nearly flat at RMB39.75 billion. China Quick Commerce revenues climbed 45% to RMB53.3 billion, with unit economics improving sequentially, while AliExpress turned operationally profitable. The 88VIP membership base grew by double digits to roughly 64 million, and 250 million users have completed their first AI-driven shopping experience through the Qwen app. However, customer management revenues declined 7% year over year due to weaker transaction activity and a contra-revenue accounting change, rising just 1% on a like-for-like basis. With cash and liquid investments of RMB474.5 billion (US$69.9 billion), Alibaba has ample flexibility to fund its AI ambitions.
Heavy Capex Weighs on Near-Term Profitability
Capital expenditure surged 75% year over year to RMB67.68 billion (US$9.98 billion) in the fiscal first quarter, pushing free cash flow to an outflow of RMB44.67 billion (US$6.58 billion). Adjusted EBITA fell 30%, and non-GAAP diluted earnings per ADS declined 42% to $1.26, as losses in AI Labs and Applications widened to RMB13.86 billion on higher Qwen app inference costs. Management has already deployed half of its planned RMB380 billion AI infrastructure investment for 2026-2029 and expects AI-related capex to break even within three years based on current gross margins. Alibaba anticipates AI and cloud revenue growth to accelerate further in the coming quarters alongside improving profitability, and aims to surpass 20 GW of global data-center capacity by 2032.
The Zacks Consensus Estimate for BABA's fiscal 2027 EPS is pegged at $6.41, down 1.7% from estimates issued 30 days ago, indicating 64.78% growth from the prior year.
From a valuation standpoint, BABA stock is currently trading at a trailing 12-month Price/Earnings ratio of 46.93X compared with the sector’s 27.55X. BABA has a Value Score of C.
In cloud, Alibaba competes with Microsoft (MSFT - Free Report) , Amazon (AMZN - Free Report) and Alphabet (GOOGL - Free Report) , which are scaling AI infrastructure aggressively. Microsoft is leveraging Azure and its OpenAI partnership, Amazon is expanding AWS with custom Trainium chips, and Alphabet is growing Google Cloud on the back of Gemini models and TPUs. Their far larger global data-center footprints and deeper enterprise relationships pose a meaningful challenge to Alibaba's international expansion ambitions. However, since Microsoft, Amazon and Alphabet have limited direct presence in China, Alibaba's full-stack approach spanning proprietary chips, open-weight Qwen models and cloud infrastructure provides a defensible domestic moat, which justifies holding the stock despite its current premium valuation.
BABA's Steep Valuation Raises Concern
Image Source: Zacks Investment Research
Conclusion
Alibaba's accelerating AI cloud growth, deepening full-stack capabilities and resilient commerce franchise make a strong case for existing investors to hold the stock. However, given heavy capex and margin pressure, new investors should wait for a better entry point.
View the Zacks #1 Rank List
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Alibaba Plunges 16.2% in 6 Months: 3 Key Reasons to Hold the Stock
Key Takeaways
Alibaba (BABA - Free Report) shares have plunged 16.2% over the past six months compared with a 4.1% decline in the Zacks Retail-Wholesale sector as investors weighed the company's aggressive artificial intelligence (AI) spending against declining profitability. While concerns over margins are valid, Alibaba's fundamentals tell a more nuanced story.
Accelerating cloud growth, a deepening full-stack AI ecosystem and a resilient commerce business backed by a strong balance sheet suggest that existing investors should hold the stock, even as near-term headwinds argue for patience before adding fresh positions.
BABA’s 6-Months Performance
Image Source: Zacks Investment Research
AI Cloud Momentum Anchors the Growth Story
In the first quarter of fiscal 2027 (ended June 30, 2026), revenues from AI Cloud and Compute Services jumped 45% year over year to RMB48.44 billion (US$7.14 billion), with external customer revenues also accelerating to 45%, the fastest pace in 22 quarters. AI-related product revenues reached RMB12.38 billion (US$1.82 billion), marking the 12th consecutive quarter of triple-digit growth and accounting for 35% of external cloud revenues. Profitability is improving alongside scale, as the segment's adjusted EBITA surged 133% to RMB5.63 billion, lifting the EBITA margin to 12%. Alibaba also ranked first in China's AI cloud market with a 38.1% share.
Full-Stack AI Strategy Deepens Competitive Moat
Alibaba's tight integration of proprietary chips, models and applications remains a key differentiator. T-Head's Zhenwu chips now serve more than 650 external customers, while the company opened the weights of its 2.4-trillion-parameter Qwen3.8-Max flagship model in August. At the Apsara Conference held in September 2026, Alibaba revealed that Qwen 4 is in training, with the Qwen 4.5 and Qwen 5 series projected to scale to 5-10 trillion parameters. T-Head unveiled the Zhenwu V900 AI processor, offering triple its predecessor's performance, with mass production slated for first-quarter 2027, alongside Yitian 720 and Yitian 730 CPUs for agentic workloads launching in 2027. Alibaba Cloud also plans its first regions in Türkiye, Finland and the Netherlands over the next 12 months, and launched Qwen Intelligence, an agent platform for smartphone makers.
Commerce Resilience and Strong Balance Sheet Provide Cushion
Alibaba E-commerce Group's adjusted EBITA held nearly flat at RMB39.75 billion. China Quick Commerce revenues climbed 45% to RMB53.3 billion, with unit economics improving sequentially, while AliExpress turned operationally profitable. The 88VIP membership base grew by double digits to roughly 64 million, and 250 million users have completed their first AI-driven shopping experience through the Qwen app. However, customer management revenues declined 7% year over year due to weaker transaction activity and a contra-revenue accounting change, rising just 1% on a like-for-like basis. With cash and liquid investments of RMB474.5 billion (US$69.9 billion), Alibaba has ample flexibility to fund its AI ambitions.
Heavy Capex Weighs on Near-Term Profitability
Capital expenditure surged 75% year over year to RMB67.68 billion (US$9.98 billion) in the fiscal first quarter, pushing free cash flow to an outflow of RMB44.67 billion (US$6.58 billion). Adjusted EBITA fell 30%, and non-GAAP diluted earnings per ADS declined 42% to $1.26, as losses in AI Labs and Applications widened to RMB13.86 billion on higher Qwen app inference costs. Management has already deployed half of its planned RMB380 billion AI infrastructure investment for 2026-2029 and expects AI-related capex to break even within three years based on current gross margins. Alibaba anticipates AI and cloud revenue growth to accelerate further in the coming quarters alongside improving profitability, and aims to surpass 20 GW of global data-center capacity by 2032.
The Zacks Consensus Estimate for BABA's fiscal 2027 EPS is pegged at $6.41, down 1.7% from estimates issued 30 days ago, indicating 64.78% growth from the prior year.
Alibaba Group Holding Limited Price and Consensus
Alibaba Group Holding Limited price-consensus-chart | Alibaba Group Holding Limited Quote
Valuation and Competitive Landscape
From a valuation standpoint, BABA stock is currently trading at a trailing 12-month Price/Earnings ratio of 46.93X compared with the sector’s 27.55X. BABA has a Value Score of C.
In cloud, Alibaba competes with Microsoft (MSFT - Free Report) , Amazon (AMZN - Free Report) and Alphabet (GOOGL - Free Report) , which are scaling AI infrastructure aggressively. Microsoft is leveraging Azure and its OpenAI partnership, Amazon is expanding AWS with custom Trainium chips, and Alphabet is growing Google Cloud on the back of Gemini models and TPUs. Their far larger global data-center footprints and deeper enterprise relationships pose a meaningful challenge to Alibaba's international expansion ambitions. However, since Microsoft, Amazon and Alphabet have limited direct presence in China, Alibaba's full-stack approach spanning proprietary chips, open-weight Qwen models and cloud infrastructure provides a defensible domestic moat, which justifies holding the stock despite its current premium valuation.
BABA's Steep Valuation Raises Concern
Image Source: Zacks Investment Research
Conclusion
Alibaba's accelerating AI cloud growth, deepening full-stack capabilities and resilient commerce franchise make a strong case for existing investors to hold the stock. However, given heavy capex and margin pressure, new investors should wait for a better entry point.
Alibaba currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.