Commitment to AI investment pays off, with the stock price surging and the market rewarding Alibaba

Alibaba's Q1 2026 natural year (Q4 2026 fiscal year, hereinafter the same) earnings report was released on May 13. Due to increased investment in AI and technology businesses, the company’s adjusted EBITA fell by 84% year-on-year. However, the market is highly confident in Alibaba's AI commercialization prospects, causing the stock price to rise despite a low opening.

At the most fundamental level, the logic lies in the fact that AI investment has reached a turning point for commercialization. CEO Wu Yongming placed the most crucial judgment of this quarter at the very beginning:

The full-stack AI technology investment by Alibaba has officially moved beyond the initial nurturing phase and entered a positive cycle of scaled commercial returns.。

If you only read this sentence, it might seem like common marketing jargon within AI narratives. After all, these days, whether businesses are actually related to AI or not, they tend to mention it anyway. However, what makes this quarter special for Alibaba is that the entire earnings report uses real financial figures to back up this statement. For Alibaba, AI is no longer just a 'promising prospect,' but rather 'returns have arrived.'

This quarter, Alibaba Cloud's external commercial revenue growth accelerated to 40% (up from 35% in the previous quarter), with AI-related products generating 8.971 billion yuan in Q4 revenue, accounting for 30% of Alibaba Cloud’s external commercial revenue, marking the eleventh consecutive quarter of triple-digit growth. During the earnings call, the company’s management also forecastedthat in the coming year, revenue from AI-related products will account for over 50% of external commercial revenue, officially becoming the primary driver of Alibaba Cloud's revenue growth.。

Notably, Alibaba disclosed for the first time that its ARR (Annual Recurring Revenue) for AI models and application services has exceeded 8 billion yuan, with expectations to soon surpass 10 billion yuan in the June quarter and reach 30 billion yuan by the end of the year. Looking globally, many tech companies have started actively disclosing their ARR at this juncture, often interpreted by the market as a signal of clear commercial visibility and readiness to adopt ARR-based valuation models. On the demand side, as of March 31, 2026, the number of clients on Alibaba Cloud’s ModelScope platform grew eightfold year-on-year, with model token consumption skyrocketing; enterprise AI has transitioned from an experimental phase last year into a stage of essential procurement this year.

The global emergence of ARR disclosure standards is not an isolated phenomenon, as the entire AI infrastructure industry itself has reached the same commercial inflection point.According to third-party forecasts, by 2031, the global cloud AI market size will reach 573 billion US dollars, with an annual compound growth rate of over 32%. AI cloud services will replace IaaS to become the largest category of cloud revenue.

Capital investments in supporting infrastructure have continued throughout the year. Those familiar with the capital markets have certainly felt the power of this trend in the storage sector. The combined AI capital expenditure of the world’s nine largest cloud providers is projected to reach 830 billion US dollars by 2026, as AI agents are replacing the previous one-time invocation model, making AI infrastructure the most certain investment direction for the next decade.

Alibaba's confirmation of this quarter's turning point coincides perfectly with the opening of this industrial window.

01 Undervalued growth assets

From any perspective, the Cloud Intelligence Group is the more undervalued growth asset within Alibaba Group.

Over the past four quarters, Alibaba Cloud's external commercial revenue growth accelerated from 26% in Q1 of fiscal year 2026 (Q2 of the natural year 2025) to +29% in Q2 (Q4 of the natural year 2025), +35% in Q3 (Q3 of the natural year 2025), and finally to +40% this quarter. The growth rate expanded by 14 percentage points in just four quarters; breaking it down individually shows that the magnitude of acceleration each quarter has also been increasing, with the acceleration speeding up.

Alongside accelerating revenue growth, profitability has emerged as well. The market’s previous concerns about the cloud business being 'high investment, low profit' have been positively addressed by this quarter's data. In the first quarter of 2026, the Intelligent Group recorded an EBITA of 3.8 billion yuan, a year-on-year increase of 57%; compared horizontally with the year-on-year growth rates of the previous three quarters, the highest was only 35%.This quarter, the pace of profit release directly stepped up a notch.。

Zooming out from a single quarter to the entire year, for the fiscal year 2026, the Cloud Intelligence Group achieved revenue of 158.1 billion yuan, a year-on-year increase of 34%; during the same period, Alibaba Group's consolidated revenue was 1,023.7 billion yuan, growing by 11% on a comparable basis. Cloud accounted for 11.8% of the group's consolidated revenue in fiscal year 2025, rising to 15.4% in fiscal year 2026, an increase of 3.6 percentage points within a year; for the full year, Cloud's EBITA reached 14.265 billion yuan, a year-on-year increase of 35%, with the EBITA margin maintained at 9%.

This indicates that the turning point for cloud is not just a one-quarter surge but a structural upward shift in its contribution throughout the year:Volume, growth rate, and profit release are all moving in the same direction.。

On the foundation of Alibaba Cloud’s full-year external revenue exceeding 100 billion yuan in fiscal year 2025, fiscal year 2026 still saw further acceleration. This reflects simultaneous acceleration, improved profitability, and a strategic upgrade—three things happening almost simultaneously. As a result, the label for this cloud business has shifted from 'long-term investment' to 'long-term profitability.'

It is important to note that this acceleration in the cloud segment did not occur in isolation. Models must first be developed, then used by developers, who find them useful enough to attract enterprises to pay, ultimately affecting the revenue and profit ends of the Cloud Intelligence Group. Clearly, Alibaba has performed exceptionally well at every step of this chain.

On the model side, the Qwen series has become one of the top choices for developers within the global open-source community, emerging as a leading open-source model. In April this year, the Qwen 3.6 series launched three models consecutively: Plus, Max-Preview, and the open-source 27B version. By mid-April, the Qwen 3.6-Plus achieved a single-day API usage volume of 1.4 trillion tokens, topping the OpenRouter's global daily model rankings.

On the enterprise side, the willingness to pay is supported by Alibaba Cloud’s ModelScope platform. The latter is a one-stop platform that allows enterprises to call large-scale models, build AI applications, and intelligent agents without needing to train their own models or set up infrastructure. Enterprises can directly access models like Qwen on ModelScope and develop their own AI products. As of the end of March, the number of ModelScope customers increased eightfold year-over-year, making it the largest AI application development portal in China. Also in March, Wukong, an AI agent tailored for businesses, was launched on ModelScope, marking the scaled deployment of enterprise-grade intelligent agents.

On the user side, recently, Qwen has fully integrated with Taobao. This marks the first deep integration between a globally massive e-commerce platform and a large-scale model application.This is also the industry's first full-process closed loop for AI shopping, covering product recommendations, order placement, fulfillment, and after-sales service.While enabling two-way connectivity, Qwen has been progressively integrating consumer service capabilities from other ecosystems under the Alibaba Group, such as AutoNavi and Fliggy.

The commercial return cycle of Alibaba's full-stack AI has shifted from a strategic judgment to a fact already reflected in business operations and financial reports. However, the full significance of this, along with the logic behind reshaping Alibaba’s valuation in the future, can only be understood when viewed against the backdrop of global AI industry trends.

02 The revaluation window has now opened.

Looking globally, the direction taken by leading cloud providers in 2025–2026 is essentially consistent: increasing AI capital expenditures, driving models toward industrial-grade applications, and highlighting long-term commercial metrics like ARR at the top of earnings reports. AI infrastructure, as the most certain investment direction for the next decade, has transitioned from an industry prediction to a common choice backed by substantial investments from global tech giants.

For instance, in terms of capital expenditure, Alibaba's single-quarter capital expenditure reached 26.887 billion yuan this quarter, with projections exceeding 120 billion yuan for 2025.

Group CEO Daniel Zhang described this matter very directly during the earnings call: the current development of AI resembles manufacturing, where generating more revenue requires building 'AI training factories' and 'AI inference factories,' both of which are underpinned by the construction of AI data centers. He also revealed that currently, inside Alibaba’s servers...Almost no card is left unusedThis means that these capital expenditures are not just inputs during the construction period, but operational assets already being absorbed by actual demand. Starting from the value of AI, Wu Yongming also clearly stated thatThe return path for AI investments over the next three to five years is very clear。

Greater capital expenditure and higher commercial returns indicate that Alibaba's arrival at a commercial inflection point is not an isolated phenomenon; it coincides with the opening of this industry-level window on a global scale. Now that the window has opened, the remaining question is who stands in the most advantageous position.

To answer this question about 'position,' the most direct entry point is Alibaba's domestic market. The penetration rate of AI among Chinese enterprises is significantly lower than in the US. From 2024 to 2026, policies will be intensively promoted, and the AI transformation needs of many industries have only just begun to be released.This is a structural catch-up window, and AI cloud demand will continue to grow significantly in the coming years。

There are not many companies in the Chinese cloud market capable of fully capturing this growth curve. As China’s largest public cloud platform, Alibaba Cloud achieved a 40% external commercialization growth rate this quarter, based on an external revenue volume exceeding tens of billions in FY25. This combination of large scale and high acceleration is relatively rare among major global cloud providers. On the infrastructure side, Alibaba Cloud operates 92 availability zones across 29 regions globally, making it one of the few players in the Chinese cloud market with global deployment capabilities.

The latest third-party research report shows that Alibaba Cloud holds the top position in China’s AI cloud market share at 35.8%. Gartner has consecutively rated Alibaba Cloud as a leader in the Magic Quadrant for Cloud Database Management Systems for six years, and in its 2025 generative AI evaluation, Alibaba Cloud was named the only emerging leader in the Asia-Pacific region.

In other words, Alibaba Cloud’s position in this industry-level window is shaped by a set of structural conditions: a scale large enough to handle the demand, an acceleration that continues to amplify, and infrastructure already deployed globally. This strategic position, for the entire Alibaba Group, indicates that a revaluation window is opening.

The 'cloud plus AI' business line, which has been regarded by the market as the second growth engine within Alibaba Group over the past few years, accounted for 15.4% of the group’s consolidated revenue by the first quarter of 2026, up from 11.8% a year ago.Management outlined a timeline of 3-5 years for cloud and AI to upgrade into core growth drivers during the earnings call. Based on the acceleration seen this quarter, actual realization may come sooner than expected.。

The profit potential is equally abundant. The MaaS business model, which charges by token, has a distinct feature: the marginal cost of model services decreases as scale expands. Once scale ramps up, there is further room for profit margins to rise.

Wu Yongming revealed during the earnings call that the cost of servers with equivalent configurations purchased by Alibaba this year is only half of last year's. The subscription-based ARR for models and application services on the Bailian MaaS platform has grown more than tenfold over the past six months, surpassing 8 billion yuan and set to reach 10 billion yuan this quarter. The high-profit advantage of this revenue stream is gradually becoming evident, positioning it as a healthy, high-quality growth pillar for Alibaba’s future revenue.

On top of this, the deep integration of Qwen and Taobao, along with other business ecosystems within the Alibaba Group, is continuously generating new data. This new data feeds back into the iterative improvement of the models themselves, creating a group-level flywheel where data nourishment drives efficiency gains, leading to reinvestment and further output.

Taken together, the transformation in revenue structure, profit potential, and ecosystem closed-loop is propelling Alibaba from an internet company to a new position as an 'AI infrastructure company.'And as its coordinates change, so will its valuation anchors.

03Conclusion

Over the past decade, the market has largely valued Alibaba using the PE ratio of its e-commerce business as the anchor. However, now that the e-commerce segment has entered its maturity phase, relying solely on an e-commerce PE framework can no longer adequately value Alibaba’s overall revenue, which exceeds one trillion yuan, its rapidly growing cloud and AI businesses, and its expanding industrial-grade AI infrastructure assets.

This new positioning as an 'AI infrastructure company' is not merely a label change in terms of valuation. It means Alibaba will be understood by the market as a foundational provider of industrial-grade AI computing power, models, and application services, serving as the primary enabler of large-scale AI deployment for Chinese enterprises.The valuation metrics corresponding to this identity differ completely from those of e-commerce: e-commerce focuses on GMV growth rates, user retention, and gross margin; AI infrastructure companies look at cloud revenue acceleration, AI revenue share, long-term ARR growth, and capital expenditure intensity.

The inflection point for commercial returns expected in the first quarter of 2026 marks the beginning of this shift in perception: cloud and AI will evolve from 'a part of Alibaba’s business' to 'the core identity of Alibaba.'

The industry window has opened, and Alibaba is now at the starting line. Beginning with this quarter's earnings report, the valuation logic for Alibaba will undergo a fundamental shift, triggering a revaluation process. The new identity as an AI infrastructure company is only just beginning its journey toward being fully priced by the market. $Alibaba (BABA.US)$$BABA-W (09988.HK)$$Amazon (AMZN.US)$$Alphabet-A (GOOGL.US)$

Disclaimer: This article is intended solely for learning and communication purposes and does not constitute investment advice.

163K Views