Alibaba FQ2 26 – Investment Phase

Qwen moves out front

• Alibaba is investing heavily, which means lower margins, but it appears to have hit critical mass in the open source, meaning that it is now the leading contender to win the AI race in China.
• This means that in the short-term profit estimates are likely to fall, but if this results in Alibaba becoming an AI darling rather than a crusty old retailer, then it won’t matter very much.
• The main losers here are Baidu, which is rapidly ceding its position as the AI leader in China and Meta, which has lost its leadership of open source AI to be replaced by higher-quality and completely open Chinese variants.
• FQ2 26 revenues / EPS were RMB247.8bn / RMB1.09 ahead of forecasts of RMB244.0bn but behind the EPS estimate of RMB1.31.
• This was largely due to an increase in operating expenditure as a result of investments in quick commerce, user experiences and AI-related technology.
• Headline revenue growth looked pretty weak at 5% YoY, but in the last 12 months, Alibaba has disposed of two businesses (Sun Art and Intime), which if removed from the comparison, would put growth at 15% YoY.
• A large part of this is due to the Cloud Intelligence Group, which saw revenue growth of 34% YoY to US$6.6bn as demand for AI-related products within the group continued to grow at over 100% YoY.
• This is strongly supported by Alibaba’s position in the open source community, where over 180,000 AI models based on Qwen are available for download from Hugging Face.  
• According to Alibaba, this is more than double the number of the second player, which is supported by data from an MIT and Hugging Face study, which broadly corroborates what Alibaba is saying.
• This is an important piece of detail because in a digital ecosystem or a network-based business, the key is to have at least 60% share or be twice the size of the next largest player.
• This gives the ecosystem critical mass, and in this case, Qwen is the go-to place to get an open-source AI service as well as the first choice of developers when deciding which model to base their service upon.
• Consequently, when Alibaba pushes its AI ecosystem to users, there will already be many services available that are based on Qwen that its agent can access to carry out more tasks on behalf of the user.
• It also means that it can optimise its cloud to run the Qwen model more efficiently than anyone else, which will help its cloud services business dominate the Chinese market.
• This, combined with the stabilisation of the core e-commerce business, puts Alibaba in a much better position than Amazon whose AI efforts have been pretty feeble to date.
• So feeble in fact that it appears that AWS dominance is now under threat from Azure, which has been growing much more quickly for quite some time now.
• Amazon is trading on 32.1x 2025 and 29.0x 2026 PER while Alibaba remains much cheaper on 23.5x 2025 (March 2026) and 17.1x 2026 (March 2027).
• As it is now the leading contender for the AI ecosystem in China, things are finally looking up for Alibaba.
• I continue to have a position in Alibaba and am increasingly optimistic that I might actually make some money out of it.