Should Alibaba Investors Lock In Gains as AI Drives Growth?

The Mixed Picture Behind Strong Numbers

Alibaba’s fiscal Q2 performance tells a compelling yet complicated story. While the e-commerce and cloud segments posted impressive revenue figures, the company’s bottom line tells a different tale—one where aggressive spending is consuming profits and cash faster than most realize.

Cloud Business Powers Ahead on AI Demand

The cloud computing segment remains Alibaba’s growth engine, with artificial intelligence (AI) products serving as the primary accelerant. Cloud intelligence revenue surged 34% to $5.6 billion, significantly outpacing the prior quarter’s 26% growth rate. More remarkably, AI product revenue more than doubled sequentially, demonstrating explosive demand from enterprise customers.

The segment’s EBITA—a financial metric measuring earnings before interest, taxes, and amortization—jumped 35% to $506 million. Yet here’s where the reality check begins: management flagged that demand currently exceeds capacity. The company may need to expand its capital expenditure budget substantially, though supply chain constraints could complicate infrastructure scaling efforts.

E-commerce Investing Heavily for Market Share

Alibaba’s core e-commerce business generated $18.6 billion in Q2 revenue, up 16% year-over-year. However, the segment’s profitability collapsed, with EBITA plunging 76% due to aggressive quick-commerce investments.

Quick-commerce revenue—the company’s push to deliver goods within an hour—surged 60% to $3.2 billion. This represents Alibaba’s bet-the-company growth initiative. Management explicitly stated it’s willing to sacrifice near-term profits for this segment, targeting 1 trillion yuan ($140 billion) in quick-commerce gross merchandise value within three years.

Breaking down the broader e-commerce picture:

• Third-party marketplace business: $11.1 billion (+10%)
• Direct sales: $3.4 billion (+5%)
• Wholesale operations: $947 million (+13%)

The international commerce segment (AliExpress) delivered positive results, posting 10% revenue growth to $4.9 billion and achieving profitability with $23 million in EBITA.

The Profitability Squeeze Is Real

Overall company revenue climbed to $34.8 billion (+5%, or +15% excluding divestitures), but profitability metrics deteriorated sharply. Adjusted EBITA—which measures operating earnings before interest, taxes, and amortization costs—crashed 78% to $1.3 billion. Earnings per share sank 71% to $0.61.

The cash flow picture worsened considerably. Operating cash flow dropped 68% to $1.4 billion, while free cash flow swung negative at -$3.1 billion due to quick-commerce and cloud infrastructure investments. Despite this, Alibaba maintains a solid balance sheet with $46.1 billion in cash and short-term investments against $39.5 billion in debt, plus $57.8 billion in equity investments.

Valuation Has Expanded Meaningfully

At a forward price-to-earnings ratio of 16 times estimated fiscal 2026 earnings, Alibaba stock isn’t trading at absurd valuations compared to tech peers. However, the stock has already rallied approximately 85% year-to-date, and the multiple itself has expanded considerably from historical averages.

The Case for Taking Profits

Alibaba has transformed from a cash-generating machine into an investment-heavy growth play. That transition isn’t inherently negative—the company previously proved it could convert heavy spending into profitability through its international commerce turnaround.

The concern is concentration risk. Management is betting heavily on quick-commerce success and cloud infrastructure expansion over the next several years. If these initiatives fail to deliver anticipated returns, shareholders will bear the consequences.

Given the stock’s strong year-to-date appreciation, expanded valuation multiples, and clear pivot toward growth-at-any-cost mode, investors holding positions might consider harvesting some gains at current levels rather than riding through the uncertainty ahead.