To The Moon

$Alibaba(BABA)$ The key highlights of its Q1 earnings report are twofold: a robust recovery in its cloud business and a significant ramp-up in capital expenditures. In contrast, domestic e-commerce performance remained stable but offered no surprises. While the cash-burning food delivery wars did impact profits, the market has largely priced this in, making it less of a current focus.

Cloud Services: The True Growth Engine Powered by AI

Alibaba Cloud's revenue grew by 26% year-over-year, not only exceeding market expectations (22%-23%) but also maintaining the same growth rate as external cloud services. This demonstrates that even amid policy headwinds and overseas chip restrictions, the explosive demand for domestic AI computing power has been sufficient to drive Alibaba Cloud's new growth cycle. This is a key point underlying what many refer to as the "AWS moment."

However, it's important to note that the cloud business's profit margin stands at only 8.8%, below the market-expected 9.3%. This reflects that while AI inference and training services are driving revenue growth, depreciation costs and hardware investments are eroding profits. My assessment is that Alibaba Cloud will continue to operate within the "high growth + low profit" range over the next few quarters (similar to AWS's performance immediately after turning profitable, though with a key difference: current AI capital expenditures will exert a more significant impact on future profit margins).

E-commerce: Stable but lacking highlights

Customer Management Revenue (CMR) for Taobao and Tmall grew by 10% year-over-year, largely in line with market expectations but below the previous quarter's 12% growth. EBITA for the China e-commerce segment declined by 21% year-over-year, indicating that profitability continues to erode amid intense competition and subsidy-driven consumption.

The underlying concern here is that $PDD Holdings Inc(PDD)$ and Douyin E-commerce continue to erode market share, while $JD.com(JD)$ 's self-operated business and proprietary brands remain relatively stable. Alibaba needs to offset this through new fee mechanisms (such as last year's software service fees), but whether it can sustainably stabilize its take rate in the long term remains to be seen in the second half of the year.

CapEx: Accelerating AI Investment

Capital expenditures surged by 57% quarter-over-quarter to ¥39 billion (approximately $5.4 billion), nearly doubling from the same period last year. Unlike international peers who have generally scaled back investments due to chip shortages, Alibaba's decision to ramp up spending at this juncture signals its full-court press on domestic chips and AI inference demand. This strategy serves both defensive (preventing bottlenecks from computing power shortages) and offensive (seizing future AI application traffic gateways) purposes. However, the challenge lies in the fact that the actual commercialization of AI applications requires time, which will weigh on cash flow in the short term.

International E-commerce and Other Businesses

International e-commerce (AliExpress, Lazada, Trendyol) revenue grew 19% year-over-year, with losses narrowing significantly to just -RMB 59 million—a marked improvement from the previous quarter's -RMB 3.6 billion. This indicates Alibaba's overseas operations have finally entered a "profitability phase." However, compared to the surprise performance of $Sea Ltd(SE)$ this quarter, Lazada's results did not fully meet investor expectations.

As for subsidiaries such as Hema, AliHealth, and AutoNavi, their revenue performance diverged, collectively dragging down the "Other Segments" category, which saw a 28% year-on-year decline.

The core issue that requires attention now

1. The Profitability Inflection Point for AI Cloud Services — Can High Growth Translate into High Profitability?

2. E-commerce Competitive Landscape — Can the New Fee Structure Stabilize Taobao and Tmall's Take Rate?

3. The Burn Period for Instant Retail/Food Delivery — How Long Will Current Subsidies Last and How Will They Impact Overall Group Profit Margins?

4. Sustainability of Capital Expenditures — Will Massive AI Investments Impact Shareholder Returns?

Valuation

Currently, Alibaba's ADR is trading near $119.6, with most market targets set above $150, theoretically leaving about 25% upside potential. However, from a risk perspective, slowing GMV growth, intensifying competition, and uncertainties surrounding AI investments could impact future realization. My previous SOTP valuation of Alibaba suggests that if all business segments were valued separately, the valuation could potentially exceed $200.

The market may temporarily assign a premium to Alibaba's AI cloud business, but long-term returns hinge on whether the company can transform its AI investments into a genuine competitive advantage.