Alibaba's AI and Cloud Breakthroughs: A New Earnings Narrative?

In the second quarter of 2025, Alibaba Group's Cloud Intelligence Group (CIG) delivered a performance that has begun to redefine investor perceptions of the Chinese tech giant. With a 26% year-over-year revenue surge to $4.66 billion, Alibaba Cloud's growth rate accelerated sharply from 18% in the prior quarter, driven by triple-digit expansion in AI-related product sales. This acceleration has sparked a re-evaluation of Alibaba's long-term value proposition, particularly as the company's strategic bets on AI infrastructure and cloud computing begin to outshine the volatility of its core e-commerce business.

Strategic AI Unit Acceleration: A Catalyst for Earnings Re-rating

Alibaba's AI initiatives are no longer just a growth story—they are a profitability engine. The CIG's adjusted EBITA surged 26% year-on-year, outpacing revenue growth and signaling improved margin discipline. This is a stark contrast to the broader Alibaba Group, which reported a 2% revenue increase to 247.65 billion yuan but faced margin pressures from aggressive investments in instant commerce. The cloud unit's success stems from its focus on AI-native tools, such as the Qwen3-Coder model, and its proprietary AI chip, set to launch in late 2025. By reducing reliance on foreign suppliers like Nvidia, Alibaba is not only insulating itself from geopolitical risks but also enhancing cost efficiency—a critical factor in sustaining high-margin AI services.

The company's three-year, $53 billion investment plan into cloud and AI infrastructure further underscores its commitment to vertical integration. This includes expanding data centers, developing advanced AI models, and optimizing hardware-software ecosystems. Such investments are already paying off: Alibaba's open-source Qwen models have been downloaded over 300 million times, creating a flywheel effect that drives adoption and monetization.

Cloud Growth: Closing the Gap with Global Hyperscalers

While Alibaba Cloud holds a modest 4% global market share (compared to AWS's 30% and Azure's 20%), its growth rate is closing the gap. In Q2 2025, Alibaba Cloud's 26% year-on-year revenue growth matched Azure's performance and outpaced AWS's 17%. This is particularly notable given the cloud unit's focus on the Chinese market, where it dominates with a 36% share. The company's AI cloud services now account for 33% of the domestic market, driven by aggressive pricing and open-source initiatives that lower barriers to adoption.

However, global expansion remains a challenge. U.S. chip export restrictions and regulatory scrutiny in international markets have limited Alibaba's reach. Yet, the company's focus on localized AI solutions—such as its Qwen3-Coder model tailored for enterprise workflows—positions it to capture incremental demand in China, where AI adoption is accelerating. Analysts project 25–30% revenue growth for Alibaba Cloud in fiscal 2026, suggesting that its market share could rise as AI monetization scales.

Investor Sentiment: From Skepticism to Optimism

Alibaba's stock price has surged 19% in Hong Kong and 13% in the U.S. following its Q2 earnings, reflecting a shift in investor sentiment. The company's P/E ratio of 11.8x, well below its 5-year average of 22.3x, highlights undervaluation despite strong cloud performance. Analysts now see Alibaba as a “durable cash generator” in the AI era, with 86% of recent calls rated as “Buy” and an average price target of $159.67.

This optimism is rooted in Alibaba's ability to balance short-term margin pressures with long-term growth. CEO Eddie Wu's emphasis on prioritizing cloud expansion over near-term gross margin gains has resonated with investors, who are increasingly valuing AI-driven earnings potential over traditional metrics. The cloud unit's triple-digit AI revenue growth—now a key component of external customer revenue—has created a compelling narrative for re-rating.

A Case for Re-evaluating Long-Term Exposure

For investors, Alibaba's AI and cloud breakthroughs present a compelling case for re-evaluating long-term exposure. While the core e-commerce business faces headwinds, the cloud unit's strategic alignment with AI trends offers a durable growth story. Key risks include regulatory uncertainties and global competition, but Alibaba's vertical integration and domestic market dominance provide a buffer.

Investors should consider Alibaba as a high-conviction play in the AI cloud sector, particularly if the company continues to execute on its AI monetization and margin expansion. The stock's current valuation appears to discount the cloud unit's potential, creating an opportunity for those willing to tolerate short-term volatility for long-term gains.

Conclusion

Alibaba's AI and cloud initiatives are no longer peripheral—they are the cornerstone of a new earnings narrative. With strategic investments in AI infrastructure, a dominant position in China's AI cloud market, and a valuation that appears to undervalue its growth potential, Alibaba is well-positioned to redefine its role in the global tech landscape. For investors seeking exposure to the AI revolution, Alibaba's cloud unit offers a compelling, if underappreciated, opportunity.