Thinking of Buying Alibaba Stock? Here's 1 Green Flag and 1 Red Flag.

Key Points

• AI cloud could be the answer to Alibaba's next phase of growth.

• But core e-commerce is still dragging.

• Investors should have the right expectations when investing in the stock.

• 10 stocks we like better than Alibaba Group ›

Alibaba (NYSE: BABA) was once the crown jewel of China's internet economy. Today, it's more complicated. The e-commerce giant has faced regulatory crackdowns, weakening Chinese consumer marketing, and fierce competition from fast-moving rivals like Pinduoduo and Douyin.

Yet beneath the surface, Alibaba is quietly undergoing a significant transformation -- one that could define its next decade.

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For investors considering the stock today, here's one green flag that signals long-term potential, and one red flag that still casts a shadow.

Image source: Getty Images.

Green flag: AI and cloud could rewrite Alibaba's growth story

Alibaba is no longer content with being just an e-commerce platform. Its most ambitious bet today is on becoming an artificial intelligence (AI)-native enterprise -- and the heart of that shift lies in Alibaba Cloud.

Once seen as a lower-margin, China-centric hosting business, Alibaba Cloud has repositioned itself around artificial intelligence. At the core of this transition is its integration with Qwen -- Alibaba's open-source large language model (LLM), which significantly expands the platform's reach beyond just cloud infrastructure.

Qwen itself is no lightweight. The latest version, Qwen3, rivals the performance of OpenAI's GPT-4 and Google's Gemini in several benchmark tasks. But that's just one part of the story. The most significant strategic move that Alibaba Cloud has undertaken for Qwen is to make it open-source, inviting anyone to leverage its model to build their own AI applications.

This open AI strategy positions Alibaba Cloud to expand beyond China into emerging markets and Southeast Asia, especially in markets where U.S. tech dominance is weaker. As developers build on Qwen, they will naturally utilize other services offered by Alibaba. In other words, Alibaba Cloud aims to become a full-stack AI ecosystem for developers and businesses.

Besides investing in Qwen, Alibaba Cloud is also doubling down on its investment in core infrastructure, aiming to invest around $50 billion in the next three years. This planned investment will exceed Alibaba's total AI and cloud spending over the past decade, demonstrating the company's commitment to becoming a leading AI cloud provider.

If successful, AI and cloud computing could become Alibaba's growth driver for the next decade, just as AWS is now a key growth driver for Amazon.

Red flag: Core e-commerce is still struggling to regain its past glory

While AI captures investor attention, Alibaba's core revenue continues to come from domestic commerce. In fiscal year 2025 (ended March 31), this segment accounted for 45% of revenue and 113% of adjusted earnings before interest, taxes, and amortization (EBITA) -- a sign that Alibaba's profits remain heavily dependent on its e-commerce operations. Note that EBITA was 113% since other segments recorded a combined loss in 2024.

But growth is sluggish. In fiscal year 2025, ended March 31, 2025, Taobao and Tmall revenue grew just 3%, as consumer sentiment in China remained soft amid a weak economic backdrop and ongoing geopolitical tensions. At the same time, Alibaba is facing intense competition from Pinduoduo's low-price strategy and Douyin's short video commerce -- both of which are quickly capturing market share.

Alibaba has attempted to respond by incorporating AI into its shopping experiences and intensifying efforts to reengage merchants and users.

Encouragingly, domestic e-commerce revenue grew 9% year over year in the March 2025 quarter -- a notable improvement from the full-year trend. If Alibaba can sustain its execution, it can continue to ride the tailwinds of a growing GDP per capita and a growing retail industry.

Still, Alibaba has to prove it can sustain this momentum. The structural pressures -- from competition to shifts in consumer behavior -- won't disappear overnight.

What does it mean for investors?

Alibaba is at a crossroads.

On one hand, it's laying the foundation for long-term success through open-source AI, cloud infrastructure, and international expansion. On the other hand, its dominant Chinese e-commerce business is facing challenges that may persist for some time.

For investors looking for short-term upside, there are cleaner growth stories elsewhere. However, those willing to wait for the AI flywheel to turn and who believe Alibaba can navigate China's evolving economic landscape may find this to be an underappreciated opportunity.

Either way, Alibaba deserves a spot on your radar.

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Lawrence Nga has positions in Alibaba Group and PDD Holdings. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.