Alibaba's AI-Driven Cloud Transformation: A New Engine for Long-Term Growth

Alibaba Group has long been synonymous with e-commerce, but in 2025, its strategic repositioning as a leader in artificial intelligence (AI) and cloud computing is reshaping its investment narrative. With cloud revenue surging 34% year-over-year to RMB 39.8 billion ($5.6 billion) in Q3 2025, and AI-related revenue growing at triple-digit rates for nine consecutive quarters, the company is no longer just a digital marketplace-it's an infrastructure provider powering China's AI revolution. This transformation, coupled with a stabilized e-commerce base, positions Alibaba as a compelling candidate for a re-rating in 2026.

Cloud Revenue: A 34% Growth Engine

Alibaba Cloud's Q3 2025 performance underscores its emergence as a critical growth driver. The unit's total revenue rose 34% year-over-year, with external customer revenue up 29%. This growth is fueled by surging demand for AI services, including machine learning, natural language processing, and generative AI tools. According to a report by , the cloud segment exceeded market expectations, with revenue surpassing the projected RMB 37.9 billion. CEO Eddie Wu emphasized that AI investments are accelerating the Cloud Intelligence Group's expansion, positioning it as a cornerstone of Alibaba's long-term strategy.

Dominance in China's AI Infrastructure

Alibaba Cloud's leadership in China's AI infrastructure market is unparalleled. With a 35.8% market share in Q3 2025, it outpaces the combined total of the next three largest providers. This dominance is reinforced by its triple-digit growth in AI-related revenue, driven by enterprises adopting cloud-based AI solutions for everything from supply chain optimization to customer analytics. Data from OMDIA reveals that Alibaba Cloud maintained a 34% share of mainland China's cloud infrastructure market in Q2 2025, a figure that likely held steady in Q3 given the sector's 20%+ growth trajectory.

The company's capital expenditures further cement its infrastructure edge. Over the past four quarters, Alibaba spent RMB 120 billion on AI and cloud infrastructure, with plans to invest an additional RMB 380 billion over the next three years. These investments are not just defensive-they're strategic, ensuring Alibaba can meet the escalating demand for AI compute power and data storage as Chinese enterprises digitize.

E-Commerce Stabilization: A Solid Foundation

While the cloud/AI segment dazzles with hypergrowth, Alibaba's e-commerce business provides a stable foundation. In Q3 2025, e-commerce revenue grew 16% to RMB 132.6 billion, driven by improvements in customer management and the quick commerce business, which saw a 60% revenue increase. This performance highlights Alibaba's ability to adapt its core business to evolving consumer trends, such as same-day delivery and personalized shopping experiences.

The contrast between the e-commerce segment's moderate growth and the cloud/AI unit's explosive expansion is key. E-commerce remains a cash-flow generator, while cloud/AI represents a high-margin, high-potential growth engine. This duality mirrors Amazon's transition from a retail-focused company to a cloud and AI juggernaut-a trajectory that historically led to significant re-rating.

Re-Rating Potential in 2026

Alibaba's strategic repositioning aligns with global trends in AI adoption, where cloud infrastructure is the backbone of innovation. The company's triple-digit AI revenue growth and 34% cloud revenue increase suggest it is capturing a disproportionate share of China's AI boom. Meanwhile, its e-commerce base, though less dynamic, provides financial flexibility to fund further AI and cloud investments.

Analysts argue that Alibaba is one of the most mispriced AI cloud plays in the market. With its cloud business now contributing a growing portion of total revenue and margins improving due to AI-driven automation, the stock could see a re-rating as investors recognize its dual strengths: a stable e-commerce core and a high-growth cloud/AI segment.

Conclusion

Alibaba's AI-driven cloud transformation is not just a technological pivot-it's a strategic masterstroke. By leveraging its infrastructure dominance, aggressive capital spending, and a stabilized e-commerce base, the company is building a moat around its AI and cloud offerings. As China's AI ecosystem matures, Alibaba is well-positioned to benefit from both the demand for cloud services and the innovation cycle around generative AI. For investors, this dual-engine model offers a compelling case for long-term growth and a potential re-rating in 2026.