Alibaba’s core profit plunges 84% as CEO defends AI investments

Alibaba on Wednesday said its core profitability plunged in the March quarter amid heavy investments in tech and e-commerce, as executives talked up the company’s AI spending.

Executives at the technology giants spent the earnings call defending 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.

Alibaba’s U.S.-listed shares were initially higher in premarket trade before turning negative. The shares fell as much as 4% before paring losses.

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.

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…