Alibaba Profit Plunges 75% as AI Infrastructure Spending Surges

China's Alibaba reports a 75% drop in profit for the latest quarter from the year before to roughly $1.6 billion as it invests heavily in AI infrastructure. [5] In a bid to secure its market position, the tech giant heavily ramped up AI capital expenditure, betting future growth on its enterprise cloud and AI model services. [4] Despite the profit contraction, the group reported a 9% rise in revenue for April-June, as strong AI demand fuelled growth in its cloud business. [4]

Alibaba's quarterly profit fell 75% as the company significantly increased capital expenditure for AI infrastructure and model services. [4] Cloud revenue rose 45% but capex also rose 75%. [4] To manage these escalating costs over the long term, the CEO hopes to replace commercial chips in data centres with Alibaba's T-head chips. [4]

To ensure adequate capital for this transition, Alibaba announces $10.2bn share placement as Chinese companies expand AI investment. [6] This extensive capital raise coincides with a broader national trend of Chinese companies heavily expanding their investments into artificial intelligence capabilities. [6]

This earnings report follows ongoing pressures from earlier in the year. [1] The previous quarter set a low bar. [1] Alibaba missed on both revenue and profit in Q3, delivering adjusted earnings of RMB 7.09 per ADS against analyst expectations of RMB 10.94 - a substantial shortfall that left investors questioning whether AI investment costs were running out of control. [1]

Leading into these announcements, analysts had maintained muted expectations. [1] According to FactSet data, analysts are projecting quarterly revenue of 246.5 billion yuan, up from 236.45 billion yuan in the same period a year ago. [1] Additionally, net profit is forecast at 11.16 billion yuan, down from 12.38 billion yuan in the equivalent quarter last year. [1] Wall Street expects EPS of $0.90 for the quarter, compared to $1.83 in the same period a year earlier - a contraction of more than 50%. [1]

The massive 75% contraction in quarterly profit highlights the sheer scale of capital required to compete in the generative AI era. Alibaba's reported 45% surge in cloud revenue demonstrates that AI demand is translating into top-line growth, but the corresponding 75% jump in capex shows the costs of servicing that demand are currently outpacing the returns. By moving to replace commercial chips with its proprietary T-head silicon, Alibaba is attempting to vertically integrate its infrastructure to improve margins, a strategy echoing efforts by US hyperscalers like Google and AWS to develop custom AI accelerators. The newly announced $10.2bn share placement suggests the company expects this heavy investment cycle to continue for the foreseeable future. What the sources don't address: Whether the integration of in-house T-head chips will fully offset the soaring costs of AI data center expansion before investors lose patience with the profit decline.