- Alibaba’s cloud revenue surged by 34% year-on-year in Q2, surpassing what the market expected.
- Investors are turning their attention to the cloud segment, particularly its AI-related contributions.
- In premarket trading, shares of Alibaba rose by 4% as investors reacted to the news.
On Tuesday, Alibaba’s CEO Eddie Wu stated that the company might step up its investments in artificial intelligence if the appetite for such technology continues to soar. This was after Alibaba, known as a heavyweight in the tech industry, reported impressive sales growth in its crucial cloud sector.
In the lead-up to the midday market, Alibaba’s shares saw a bump of about 4.3% as investors chose to look past a decline in overall profits.
Here’s a snapshot of Alibaba’s results from its fiscal second quarter, which ended on September 30, compared to estimates from LSEG:
- Overall revenue increased by 5% to hit 247.8 billion yuan (approximately $34.8 billion), slightly ahead of last year’s 242.65 billion yuan.
The spotlight is clearly on Alibaba’s cloud computing operations, which has seen consistent growth thanks to a boost from AI initiatives. Just to illustrate, the company reported a 34% increase in cloud computing revenue—hitting 39.8 billion yuan—far exceeding expected figures of 37.9 billion yuan. This growth rate also outpaced the 26% increase recorded in the prior quarter.
During the earnings call, Wu highlighted that Alibaba’s investments in AI have positively influenced its cloud division. “Strong AI demand has further invigorated our Cloud Intelligence Group, leading to the 34% revenue surge, while AI-related product revenue stapled a triple-digit growth for nine quarters in a row,” he mentioned.
Wu pointed out that AI product demand is “on the rise.” He noted, “We see tremendous demand for AI. It’s moving quickly, and we’re struggling to keep up as far as rolling out new servers goes.”
Earlier in September, Alibaba had revealed plans to ramp up investment in AI technologies and infrastructure, building on the previously announced 380 billion yuan ($53 billion) funding commitment over the next three years. Wu added that Alibaba has put around 120 billion yuan into AI and cloud development in the last four quarters.
Addressing future capital expenditures, Wu expressed cautious optimism that the initial target of 380 billion yuan might be low and hinted at the potential for even further investment if demand is robust.
With its recent advancements, Alibaba is quickly becoming a key player in the AI landscape in China. The company’s Qwen app, developed in response to OpenAI’s ChatGPT, achieved over 10 million downloads just a week after its launch, indicating a strong market interest.
On the profitability front, earnings before interest, taxes, and amortization (EBITA) attributed to the cloud division rose by 35%, amounting to 3.6 billion yuan.
Alibaba CEO Addresses AI Market Concerns
Wu also weighed in on current AI market sentiments, suggesting that existing AI models have room for improvement rather than being at a dead end. He anticipates a consistent demand for AI over the next three years.
Furthermore, he highlighted that supply chains related to data centers and semiconductors might experience challenges. This trend encompasses manufacturers of memory chips and GPUs.
“In the is approaching three years, the demand for AI resources is likely to continue to outpace supply,” Wu remarked, commenting on the heavy reliance on NVIDIA-designed GPUs that are currently operating at maximum capacity.
Wu appeared to acknowledge ongoing discussions regarding GPU depreciation timelines.
Considering these aspects, he conveyed confidence that there isn’t much risk of a so-called AI bubble in the coming years.
Investors Overlook Drop in Profitability
Simultaneously, Alibaba has been actively competing in the rapidly evolving instant commerce landscape, a strategy that promises swift delivery times on select products.
This push into new territories has had some impact on the overall profitability of Alibaba, even as the cloud sector continues to do well.
Last quarter’s adjusted EBITA saw a substantial 78% dip year-on-year, landing at 9.1 billion yuan, with some of the loss attributable to investments in instant commerce.
That said, investors seem undeterred, focusing instead on the strong growth trajectory of the cloud computing division and Alibaba’s core e-commerce business, which includes revenue from platforms like Taobao and Tmall. In fact, revenue from China’s e-commerce market rose by 16% year-on-year to reach 132.6 billion yuan, marking faster growth compared to previous quarters.
Additionally, revenues from quick commerce grew even more dramatically, surging by 60% year-on-year, up from 12% in the prior quarter.
Wu pointed out the advancements in this area: “In our consumption division, quick commerce has been expanding significantly, enhancing unit economics and driving up monthly active users on the Taobao app.”
Reflecting on Alibaba’s aspirations, Jiang Fan, head of the e-commerce segment, described quick commerce as a “strategic pillar,” with ambitions to achieve a gross merchandise value of 1 trillion yuan within three years.
