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Alibaba Group Holding Ltd. ( $Alibaba(BABA)$ , BUY) - Strategic Investments Weigh on Profit, but Core Growth Engines Accelerate; Maintain BUY and $145 PT—Tiger Research

We are maintaining our BUY rating and $145 PT after Alibaba reported June quarter FY2026 results that showed a solid print despite headline profit softness, as the company’s heavy investments in quick commerce weighed on margins.

Revenue reached RMB247.7 billion, up 10% year-over-year on a like-for-like basis excluding Sun Art and Intime, while adjusted EBITA fell 14% as management leaned into scaling Taobao Instant Commerce. The underlying message from the quarter is that Alibaba’s two strategic pillars—consumption and AI + Cloud—are gaining real traction and management’s outlook remains upbeat.

On the commerce side, customer management revenue rose 10% year-over-year (vs. +12% last quarter), with management highlighting that take rate improvement, additional software service fees, and rising penetration of Quanzhantui all contributed to the acceleration. Importantly, quick commerce is beginning to show its strategic value, not only expanding the Taobao app’s consumer base but also driving incremental traffic and engagement that feed directly into CMR growth. Management expects this dynamic to continue, with CMR likely sustaining its momentum in coming quarters as incremental GMV from quick commerce channels is monetized through advertising and promotions.

Alibaba Cloud delivered another strong performance, with revenue growth accelerating to 26% year-over-year (vs. +18% last quarter). AI-related products once again maintained triple-digit growth, now accounting for over 20% of external customer revenue. Management struck an optimistic tone on the outlook, pointing to robust demand for both training and inference workloads, and highlighting adoption across sectors from automotive to education and healthcare. With a RMB 380 billion three-year CapEx plan firmly in place, Alibaba sees itself well positioned to capture above-market growth in China’s cloud sector, with share gains prioritized over near-term margin expansion.

Quick commerce is the most visible area of investment drag, but also the clearest near-term growth story. Taobao Instant Commerce, launched in April, has already scaled to 300 million monthly active consumers and achieved peak daily order volumes of 120 million. Management guided that the business could contribute RMB 1 trillion in incremental GMV within three years. With this rapid scaling, unit economics are expected to improve, and UE losses should be cut in half soon as customer mix, order mix, and logistics efficiency improve. However, management also cautioned that the September quarter is seasonally strong for food delivery, which may lead to a sequential increase in losses even as scale efficiency progresses.

During the June quarter, the company bought back the equivalent of 7 million ADSs for a total of US$815 million in the U.S. market. As of June 30, 2025, Alibaba still had US$19.3 billion of authorization remaining, which runs through March 2027. Management reiterated its commitment to a balanced capital return strategy, combining buybacks, dividends, and reinvestment into growth, with flexibility to adjust the pace based on market conditions and strategic priorities.

Overall, the June quarter highlighted the strength of Alibaba’s core businesses and the early payoffs from its strategic investments. CMR is showing structural momentum, cloud growth is accelerating on the back of AI adoption, and quick commerce is already reshaping consumer engagement with tangible synergies to core commerce. While near-term profitability is pressured by investment, the long-term growth levers are clearer, with management projecting sustained CMR growth, durable 20%+ cloud expansion, and RMB 1 trillion in incremental GMV from quick commerce. The quarter should be taken as evidence that Alibaba’s strategic pivots are bearing fruit, even as management invests heavily to secure future growth.

Estimate revisions. F2Q total revenue estimate largely unchanged, but decreasing EBITDA estimate by 21%, on investments in quick commerce. Decreasing FY26 revenue estimate by 1%, and decreasing EBITDA estimate by 15%.

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