BREAKINGVIEWS-Alibaba partly punctures China's AI hopes

By Robyn Mak

HONG KONG, May 16 (Reuters Breakingviews) - After talking up the promises and opportunities of artificial intelligence, Alibaba 9988.HK boss Eddie Wu is struggling to deliver. The Chinese e-commerce group's shares plunged nearly 8% in New York following tepid quarterly earnings. An unexpected drop in its cloud computing unit's profitability hints at some significant problems.

The $295 billion company on Thursday unveiled a mixed set of results. Revenue in the three months to end-March rose a decent 7% year-on-year, to roughly 236 billion yuan ($32.8 billion), partly thanks to a 12% increase in core marketing revenue from its Chinese shopping platforms. The company's international e-commerce, local services, digital media and cloud computing businesses all saw double-digit percentage sales growth too.

Yet adjusted earnings before interest, tax and amortisation - Alibaba's preferred profit metric - for most of those units fell short of analyst expectations. Local services, for instance generated a loss of 2.3 billion yuan, more than twice what analysts polled on Visible Alpha had expected. Intensifying price wars in food delivery and quick commerce against Meituan 3690.HK and new entrant JD.com 9618.HK are probably to blame.

More concerning may be Alibaba's AI outlook. Following upstart DeepSeek's groundbreaking training models released earlier this year, investors baked in lofty expectations. Yet Alibaba's cloud computing division saw revenue and EBITA fall from the previous quarter. Wu noted that due to the Chinese New Year holiday, the recent quarter was not "really very representative of the overall pace of development". But a quarter-on-quarter decline in the unit's adjusted EBITA margin is worrying as competition heats up.

There's also a dip in the Hangzhou-based company's capital expenditure compared to the previous three-month period; that points to "uncertainty around AI chip availability", analysts at J.P. Morgan observe. Whereas rival Tencent 0700.HK earlier this week made clear that its stockpile of AI chips should protect it from U.S. export restrictions, Alibaba simply said "it will not be derailed by short-term supply chain fluctuations".

China has revealed a series of impressive AI advances in recent months. Alibaba's earnings are the clearest sign yet that returns on these may be a long time coming.

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CONTEXT NEWS

Alibaba on May 15 reported revenue of 236.5 billion yuan in the quarter ended March 31, an increase of 7% from a year earlier. Adjusted earnings rose 22% to 29.8 billion yuan.

Revenue from its cloud computing division rose 18% year-on-year, to 30.1 billion yuan. The company also said "AI-related product revenue maintained triple-digit year-over-year growth for the seventh consecutive quarter".

Alibaba's New York shares closed down 7.6%, to $123.90, on May 15.