Alibaba's core profit plunges 84% as CEO says return on AI investments are 'extremely clear'

Alibaba shares jumped on Wednesday as investors liked the e-commerce giant's bullish tone on AI, even as it reported a plunge in its core profit for the March quarter.

Following the release of Alibaba's earnings, the stock fell by as much as 4% in pre-market trade.

But it rallied after the open as executives defended the company's investments, telling analysts that they will eventually pay off.

"We see the ROI (return on investment) on this investment in the next 3-to-5 years as being extremely clear," Wu said on the earnings call on Wednesday.

The Chinese tech giant said its adjusted earnings before interest, taxes, and amortization (EBITA), a measure of the company's underlying profitability, came in at 5.1 billion Chinese yuan ($750.9 million), an 84% year-on-year drop.

This financial metric strips out one-time gains or losses to focus on a company's core business.

Wu said the demand for AI is so strong that the company will have to spend more on compute in the next five years than its previous three-year 380 billion yuan capital expenditure projection.

However, this may not necessarily mean a rise in capex as some of the compute power could be rented as part of Alibaba's operating costs.

Alibaba's Hong Kong listed shares year-to-date.

The tech giant has been investing heavily in semiconductors for AI, data centers, and the development of its own family of models under the brand of Qwen. This has paid off in its cloud computing segment.

While cloud has been a bright spot for Alibaba, driven by AI demand in China, investors have been grappling with the company's continued investments into so-called quick or instant commerce. This is a shopping service that allows users to get good with super-fast delivery speeds under an hour, and it has become somewhat of a battleground for China's e-commerce giants.

Adjusted EBITA in Alibaba's China e-commerce group dropped 40% year-on-year in the March quarter on the back of these investments, even as customer management revenue — its single-largest contributor — grew 1%.

However, Alibaba is seeing strong growth from those investments with quick commerce revenue up 57% year-on-year. Alibaba's overall China e-commerce revenue was up 6% year-on-year in the March quarter.

Alibaba's investments in technology appear to be paying off in its cloud computing unit, which posted a 38% year-on-year rise in revenue in the March quarter to 41.6 billion yuan. That growth was faster than the previous quarter. Adjusted EBITA for the segment jumped 57%.

"Our strategic investments continued to translate into business growth. Cloud Intelligence Group's revenue continued to accelerate, with AI-related product revenue achieving triple-digit growth for the eleventh consecutive quarter," Alibaba CFO Toby Xu said in a press release.

Alibaba said AI-related revenue came in at 9 billion yuan.

On the earnings call, Alibaba CEO Wu said he expects annualized recurring revenue (ARR) from its AI model and application services to surpass 10 billion yuan in the June quarter and 30 billion yuan by year-end.

Alibaba indicated it would not let up on its investments in AI.

"We've been very resolute in making those investments over the past year and looking forward to the next two years, we intend to be equally resolute in continuing these investments because we see this as a critical window of opportunity," an Alibaba executive said on the call.

Alibaba has positioned itself as one of China's leading players, developing chips for AI and selling its services via its cloud computing unit. Its Qwen AI models are among the top performing globally. Wu said Alibaba's chips give it an edge over competitors.

"As the only AI cloud provider in China capable of delivering self-developed AI chips at scale, we have secured autonomy over our compute supply chain while providing customers with highly competitive AI inference and training services," Wu said.

"In an environment of compute scarcity, this structural advantage is favorable to our revenue growth and gross margin improvement."

The Hangzhou-headquartered company has rolled out AI across its business. This week, the company announced that it will launch a Qwen-powered AI shopping assistant in Taobao, its main e-commerce product in China.