Is Alibaba a Buy on AI and Cloud Upside Potential?

Despite reporting plummeting profitability in its recent fiscal fourth-quarter earnings report (for the period ended March 30), Alibaba (NYSE: BABA) shares jumped as investors were excited about the Chinese company's artificial intelligence (AI) road map. The stock is now trading around breakeven on the year, as of this writing.

Let's dig into the company's results and prospects to see if this is a good time to buy the stock.

Image source: The Motley Fool.

AI excitement

While Alibaba's AI-related product revenue saw triple-digit growth for the 11th straight quarter, it was the company's AI chip business that got investors excited. Management said Alibaba is the only company in China capable of producing custom AI chips at scale, which gives it a big structural cost advantage.

While most often compared to Amazon in the U.S., with its own leading AI model and custom chips, Alibaba is trying to take a page out of Alphabet's book. It's embedded its Qwen AI model across its ecosystem and launched a range of enterprise products based on the model.

Overall, Alibaba's cloud intelligence segment revenue climbed by 38% to $6 billion. The segment's adjusted EBITA (earnings before interest, taxes, and amortization), meanwhile, surged by 57% to $550 million.

While Alibaba is seeing rapid cloud computing growth, its primary business is still its e-commerce operations. Unlike Amazon, whose cloud business is its biggest by profitability, the vast majority of Alibaba's profits and revenue still come from e-commerce. On this front, segment revenue rose 6% to $17.7 billion, while segment EBITA plunged 40% to $3.5 billion.

Quick commerce (delivery in one hour or less) helped power the revenue growth, with revenue soaring 57% to $2.9 billion. However, investments in this venture were also a big reason behind the drop in profitability.

Excluding quick commerce and wholesale revenue, Alibaba's e-commerce revenue fell 1%. The company's important third-party business revenue rose 1% to $10.6 billion. Direct sales fell 6% to $3.4 billion, and wholesale sales rose 3% to $861 million.

Overall, Alibaba's revenue rose by 3% to $35.3 billion, or 11% when excluding dispositions. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) plunged 61% to $2.4 billion, while its adjusted earnings per American depositary share (ADS) nosedived 95% to $0.01.

Is Alibaba stock a buy?

Alibaba's heavy investment cycle makes it a hard stock to read. Its core e-commerce business continues to struggle, so it is investing heavily in quick commerce to drive growth. The company expects to reach a scale where unit economics will be profitable by the end of 2027.

At the same time, it is also investing a boatload in AI and AI infrastructure. It has a great chance to become the AI leader in China, but this is still a relatively small part of its overall business.

As such, I'd remain on the sidelines until there is a clearer picture about the potential of these investments.

Geoffrey Seiler has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.