Alibaba FQ4 25 – AI no-show.

Economic gloom shatters AI dreams.

• Alibaba reported a mediocre set of results, underlining that the task at hand for the Chinese state is to breathe life back into the consumer economy in which it had a large part in destroying.
• The health of the Chinese economy is a crucial factor when considering the struggle with the USA, as it is the economy that will determine how long each side can subsidise the struggle before giving up.
• It was the weakness in the Soviet economy that triggered the collapse of the USSR, and while history does not repeat itself, it certainly tends to rhyme.
• This is why Alibaba’s performance is important, as it is one of the best yardsticks we have to gauge the Chinese economy without any external conjuring of the numbers.
• FQ4 25 revenues / Adj-EPS were RMB236.5bn / RMB1.57 below forecasts of RMB256.1bn / RMB1.67 as the economy and AI did not manage to fulfil the market’s expectations.
• To be fair, there has been an acceleration and an improvement across the company, but given where expectations were, the company obviously has not done as well as management had led the market to believe.
• There are two lines to watch at Alibaba which are e-commerce, which is an indicator for the economy, and the Cloud Intelligence Group, which is an indicator of where AI in China is going.

• • First, e-commerce: which grew at 12% YoY, but these numbers were skewed by the ongoing integration of Cainiao Logistics into the e-commerce business.
  • Cainiao Logistics saw a decline in revenues of 12% as revenues that were previously accounted for here were shifted to Taobao and Tmall, Alibaba’s core China e-commerce businesses.
  • Consequently, I think that the headline e-commerce growth of 12% YoY is overstated, with the reality probably something more like 5% YoY.
  • This is a far cry from a sign of a fast-recovering economy powered by domestic consumption, and leads me to conclude that the Chinese economy is stagnating at home, regardless of what the official figures claim.
  • This is why China remains so focused on exports, as it is hoped that strong demand from overseas for goods manufactured in China will offset the weakness at home.
  • Second, Cloud Intelligence Group: where revenues grew by 18% YoY which was below the market’s expectations as AI is supposed to be growing like crazy in China.
  • The notion that China is behind in AI has been proven to be wrong, and Chinese companies are creating and releasing to open-source efficient models that perform pretty much just as well as their Western counterparts.
  • However, in the West, the cloud companies that provide the infrastructure to support the roll out of AI are far bigger than Alibaba’s Cloud and are growing in the mid-twenties or over 30% YoY in Microsoft’s case.
  • Given the emphasis being given to AI in China and the hype surrounding the roll out of DeepSeek and other models in the Chinese corporate sector, Cloud should have fared much better, which is precisely what the market was expecting.
  • One can only conclude that the spending on AI in China is overstated, and that while the AI companies have the products, the enterprise customers and consumers have yet to see the value of using AI in their businesses and in their lives.
• The net result is that the economic situation in China remains difficult, and the state’s efforts to bring it back to life have had very little effect so far.
• What we get each time is a bounce of hope as the market wonders if we have finally reached the turning point, only to have its hopes dashed as the economy declines to cooperate.
• The situation has certainly stopped deteriorating, but when it will get materially better is anybody’s guess.
• Opinion is widely split on the matter, with some economists thinking that China is about to collapse and others thinking that China is about to rise from the ashes of COVID and take over the world.
• I think the reality is that the Chinese state has realised that it needs the private sector to fulfil its global ambitions, and so I think a Soviet style collapse is very unlikely.
• However, at the same time, its demographic problems caused by the one-child policy, its moribund real estate sector and large debt burden are going to make a real recovery much more difficult.
• Hence, it looks like the economy will continue to stagnate, which will limit China’s ability to subsidise its struggle with the USA.
• Alibaba has become a classic value trap, and one I am stuck in, just on the off chance that one day the economy might start to fare somewhat better.