Alibaba's Cloud Growth vs. Rising Costs: A Tipping Point for Long-Term Value?

In the high-stakes arena of cloud computing, Alibaba Cloud has emerged as a formidable contender, driven by explosive demand for AI-driven services. However, as capital expenditures (capex) and operational expenses (opex) surge to fuel this growth, investors are increasingly scrutinizing whether the company's aggressive reinvestment strategy justifies its valuation. This analysis examines Alibaba's cloud performance, cost management, and efficiency metrics against industry benchmarks, while evaluating the interplay between its retail segment and cloud ambitions.

Cloud Growth: A Double-Edged Sword

Alibaba Cloud's revenue surged 34% year-over-year in Q3 2025, reaching RMB 39.8 billion ($5.6 billion), with AI-related products driving triple-digit growth for the ninth consecutive quarter. This outperformance, particularly against a backdrop of slowing global cloud demand, underscores Alibaba's strategic pivot toward AI. CEO Eddie Wu has acknowledged that the initial three-year investment target of RMB 380 billion ($53 billion) for AI infrastructure may now be "on the small side" due to accelerating demand.

Yet, this rapid expansion comes at a cost. Alibaba's capex for FY2025 totaled CNY 85.97 billion, with RMB 120 billion allocated over the past four quarters alone. Such spending has strained profitability, as the broader Alibaba Group reported a 53% year-over-year decline in net income. The tension between growth and profitability is further compounded by supply chain bottlenecks, particularly in GPU availability, which Wu described as operating at "full capacity".

Operational Efficiency: Progress Amid Challenges

Alibaba Cloud has made strides in energy efficiency, achieving a Power Usage Effectiveness (PUE) of 1.09-among the lowest in the industry. This reflects a commitment to sustainable operations, a critical differentiator in an energy-intensive sector. Additionally, EBITA grew 35% year-over-year in Q3 2025, signaling improving profitability.

However, these gains are offset by rising opex. Alibaba's quarterly operating expenses hit $34.054 billion in Q3 2025, a 18.75% year-over-year increase. While the company's EBITA margin of 9% remains robust, it lags behind AWS (36%) and Microsoft Azure (41.5%). This disparity highlights Alibaba's challenge: scaling profitability while maintaining aggressive investment in AI and cloud infrastructure.

Peer Comparison: Capex and Efficiency Benchmarks

AWS and Microsoft Azure, the global cloud leaders, have similarly ramped up capex to meet AI demand. AWS spent $28.3 billion on capex in Q3 2025, while Microsoft allocated $34.9 billion according to Platformonomics data. These figures dwarf Alibaba's reported capex, underscoring the scale of investment required to compete globally. Despite this, Alibaba Cloud's 34% revenue growth matches AWS and Azure's performance, suggesting its strategy is resonating with customers.

Efficiency metrics, however, reveal a gap. While Alibaba's PUE is industry-leading, its EBITA margins remain significantly lower than those of AWS and Azure. This raises questions about Alibaba's ability to translate growth into profitability at a scale comparable to its peers.

Retail Segment: A Lifeline or a Liability?

Alibaba's retail segment, particularly its China E-commerce Group, has historically funded cloud investments. In Q2 2025, the retail segment grew 16% year-over-year, driven by quick commerce and 88VIP expansion. This revenue stream has enabled Alibaba to allocate RMB 120 billion to cloud and AI infrastructure over four quarters.

However, retail growth is moderating. While the segment remains a critical funding source, its slower pace-compared to the cloud's triple-digit AI growth-has compressed near-term profitability. The company's net income fell 53% year-over-year in a recent quarter, reflecting the trade-off between reinvestment and shareholder returns.

Valuation Justification: Growth vs. Costs

Alibaba's cloud division now contributes over 20% of the company's external revenue, with AI products accounting for a growing share. This diversification reduces reliance on retail, a sector facing structural challenges in China's evolving economy. Analysts like Alicia Yap of Citi have positioned Alibaba as a "full-stack AI platform," a label that could justify premium valuations.

Yet, the sustainability of this model hinges on cost management. Alibaba's capex and opex growth outpace its revenue expansion, raising concerns about long-term efficiency. While AWS and Azure demonstrate that high capex can coexist with profitability, Alibaba's lower EBITA margins suggest it has further to go.

Conclusion: A Tipping Point?

Alibaba Cloud's growth trajectory is undeniably impressive, but its valuation rests on the assumption that AI-driven demand will continue to outpace costs. The company's strategic reinvestment in infrastructure and AI models like Qwen is justified by market dynamics, yet rising capex and opex-coupled with a lag in profitability relative to peers-pose risks.

For now, Alibaba's retail segment provides a buffer, but its slowing growth underscores the need for the cloud division to achieve self-sufficiency. If Alibaba can narrow the efficiency gap with AWS and Azure while maintaining its growth momentum, its valuation may hold. However, if costs continue to outstrip margins, the tipping point for long-term value could shift sooner than anticipated.