Alibaba misses expectations as e-commerce holds back growing cloud business

By Akash Sriram and Casey Hall

March 19 (Reuters) - Alibaba 9988.HK, BABA.N on Thursday reported a 1.7% rise in third-quarter revenue but a 66.3% drop in net income, both below analysts' estimates, as heavy spending on one-hour delivery and promotions during peak shopping periods failed to spur demand.

U.S.-listed shares of Alibaba, China's largest e-commerce company, dropped more than 6% in early trading after it booked revenue of 284.84 billion yuan ($41.28 billion) for the three months through December, versus LSEG estimates of a 3.7% rise.

The company reported an adjusted profit of 7.09 yuan per American Depository Share, well short of 11.64 yuan estimates.

FIRMS PUSHING TO MAKE AI PROFITABLE

Cloud revenue outpaced expectations with growth of 36%, as Alibaba rolled out numerous AI agent integrations for the consumer-facing side of its business and scaled investments.

AI monetisation is in ​focus as major tech firms in China and beyond wrestle with how to make the era-defining technology profitable.

This week, Alibaba said it would separate its AI businesses from its cloud computing arm.

The newly formed Alibaba Token Hub business group, led by CEO Eddie Wu, is the company's clearest sign yet that it is shifting its focus to digital assistants powered by AI models that consume far more tokens - data units models use to generate language - than traditional Q&A chatbots.

According to Jamie Chen of Third Bridge, a pre-Chinese New Year promotional campaign featuring Alibaba's chatbot Qwen, which has moved beyond answering questions to facilitating consumer orders for food delivery and e-commerce, pushed daily active users to around 50 million, but usage has since fallen.

"Thirty-day retention remains relatively low, with users primarily engaging in general entertainment and consumer-related scenarios, indicating low user loyalty," Chen said.

"Over the next five years, our goal is to surpass $100 billion in combined cloud and AI external revenue," Wu told analysts in a call following earnings.

CONSUMER SENTIMENT STILL CLIPPED BY ONGOING PROPERTY CRISIS

At the end of last year, a prolonged property crisis, coupled with concerns about income stability, continued to weigh on consumer sentiment, limiting spending even during traditional periods of high expenditure.

Singles' Day sales in November extended to more than a month of promotions, but drew muted response.

Retailers ramped up discounts and subsidies to encourage spending, but cautious consumers and year-round deals diluted the event's traditional sales surge.

Heavy spending by the likes of Alibaba and JD.com 9618.HK on discounts and faster delivery to capture market share from food-delivery leader Meituan 3690.HK pressured profit margins.

Alibaba has said its focus in upcoming quarters will be to improve unit economics for its Taobao Quick Commerce division.

Executives reiterated on Thursday a target of achieving 1 trillion yuan gross merchandise volume - a commonly used metric for e-commerce sales - and said the business would be profitable in fiscal year 2029.

($1=6.9003 Chinese yuan renminbi)