Alibaba FQ1 26– Pixie Dust

Alibaba gets some AI shine.

• While the food delivery price war took its toll, Alibaba’s efforts in AI have borne some fruit in its cloud division, which the market noticed and drove the shares up 17% as some AI shine finally rubs off on Alibaba.
• Whether Alibaba can hold and extend this rally will be critical, as historically, shareholders have typically used any strength in Alibaba to get out of their positions.
• FQ1 26 revenue / EPS were RMB247.7bn / RMB2.25, broadly in line with expectations, but for some reason, this quarter, AI at Alibaba has caught the market’s interest.
• The Cloud Intelligence Group posted revenues of RMB33.4bn, up 26% YoY, which is better than AWS but not as good as Azure or Google Cloud.
• This has been the pace of growth for a while, as in FQ4 25, Alibaba reported YoY growth for the Cloud Intelligence Group of 24% YoY.
• Within that, AI revenues grew by triple digits, but this is also nothing new, as this is the eighth consecutive quarter that Alibaba has reported this.
• While the timing of this recognition is a mystery, Alibaba has been investing in AI for some time and has one of the best models available in China, which is also globally competitive.
• This is Qwen 3, which is available in a range of different sizes and where the 32B version is demonstrably more capable than a number of its much larger competitors.
• Hence, I think that an element of recognition that Alibaba is a player in Chinese AI, if not one of the leaders, has been due for some time.
• This, combined with relatively good news from the food delivery sector, is what has driven the rally in Alibaba’s shares.
• Here, losses were not nearly as bad as expected, as Alibaba has been able to leverage its scale to reduce its losses and drive revenue growth of 20% YoY in the instant commerce segment.
• This puts Alibaba in a good position to withstand the brutal competition coming from JD and Meituan, and when things settle down, start earning a decent return on these investments.
• Alibaba’s ability to hold onto and extend this rally will be crucial in deciding whether the shares have finally turned or whether this will be yet another false start.
• For the last 3 years, every time there has been a rally in Alibaba’s shares as a result of the Chinese state saying nice things about the private sector, the sellers have emerged from the woodwork, exited their positions and taken the shares back into the doldrums.
• Even with an 18% rally, Alibaba is on 16.7x March 2026 PER and 13.7x March 2027 PER, making it one of the cheapest companies involved in AI that one can buy.
• The cheapest remains Baidu, which is on 12.3x 2025 PER, but with no revenue growth and declining earnings, it is hard to see how the market will give this any attention this side of 2026.
• I still have a position in Alibaba, which is now much less beaten up than it was, but still has some distance to go to break even.
• I am holding on for break-even and a bit more.