TMTPOST --   Alibaba Group Holding Ltd.'s American depositary receipts ( ADRs ) fell about 2.3% Tuesday despite reporting better-than-expected cloud business revenue driven by artificial intelligence   ( AI )   demand. The stock decline underscored investor concerns over margin pressures as the Chinese tech giant ramps up spending on consumer subsidies and AI infrastructure while battling intensified competition in e-commerce.

Credit：Alibaba

Revenue from Alibaba ’ s key cloud division--Cloud Intelligence Group   jumped 34% year-over-year   ( YoY )   to RMB39.8 billion   ( $5.62   billion )   for   its   second fiscal quarter ended   September   30, exceeding analysts   estimated    RMB37.9 billion and accelerating from a   26% growth for   the prior quarter. AI-related product revenue achieved triple-digit   YoY   growth for the ninth consecutive quarter, bolstering overall revenue 5% higher to RMB247.8 billion,   just   outstripping   Wall Street expectation of RMB245.2 billion.

The stronger-than-anticipated results came as Alibaba intensified investments across quick commerce and AI development, driving net income down 53% to 20.61 billion yuan. Sales and marketing expenses more than doubled during the period as the company competed with JD.com Inc. and Meituan for market share.

Alibaba   CEO Eddie Wu said customer demand for AI services is accelerating faster than the company can deploy new servers, suggesting capital expenditure could exceed the previously announced 380 billion yuan over three years.

Cloud Business Outpaces Expectations as AI Demand Surges

Alibaba's cloud division delivered its strongest quarterly performance this year, with revenue rising 34% YoY   to 39.8 billion yuan. The segment's earnings before interest, taxes, and amortization ( EBITA )   increased 35%   YoY   to RMB3.6 billion. Wu attributed the acceleration to robust AI demand, noting the company faces a growing backlog of customer orders that its server infrastructure cannot keep pace with.

Alibaba   has spent around RMB120 billion in capital expenditure   ( Capex )   on AI and cloud infrastructure over the past four quarters. Wu said the initial RMB380 billion   investment target   over the next three   years   "might be on the small side" and indicated Alibaba "wouldn't rule out further scaling up that Capex investment" if demand remains strong.

Alibaba's Qwen mobile app, launched this month as a rival to OpenAI's ChatGPT, surpassed 10 million downloads within its first week. The app is powered by Alibaba's Qwen large language models and aims to eventually handle tasks like shopping on Taobao, incorporating features such as mapping, travel booking, and education.

CEO Dismisses AI Bubble Concerns Amid Investment Push

Wu on an earnings   call dismissed concerns about overinvestment in AI infrastructure, contrasting with warnings from Chairman Joe Tsai earlier this year about potential overbuilding by U.S. tech giants. Wu projected AI resources will remain undersupplied over the next three years, with demand outstripping supply across data centers and semiconductors.

"Looking ahead to the next three years, we don't really see much of an issue in terms of a so-called AI bubble," Wu said. He noted that graphics processing units from companies like Nvidia Corp. are running at full capacity, including chips three to five years old.

The CEO outlined plans to build a "full-stack" suite for AI development, spanning advanced models to infrastructure including semiconductors. Alibaba's chip unit, T-Head, has advanced efforts to compete with Huawei Technologies Co. in developing homegrown accelerators amid U.S. restrictions on advanced Nvidia chips.

Quick Commerce Growth Drives E-commerce Revenue

China e-commerce revenue gained YoY   to RMB132.6 billion, with quick commerce surging 60% versus 12% in the prior quarter. Wu said quick commerce continued to scale with significant improvement in unit economics, with cost per order falling by half since summer.

Jiang Fan, CEO of Alibaba E-commerce Business Group, called quick commerce a "strategic pillar" and projected the segment could generate RMB1 trillion in gross merchandise value   ( GMV )   within three years. The rapid expansion into one-hour delivery services has intensified competition with JD.com and Meituan, with Nomura analysts estimating industry-wide cash burn exceeded $4 billion in the second quarter alone.

The heavy investments compressed margins across Alibaba's consumption business. Overall adjusted EBITA fell 78% year-on-year to 9.1 billion yuan, which the company attributed partly to quick commerce investments.

Analysts Flag E-commerce Volatility Concerns

Despite the strong AI and cloud performance, analysts highlighted management comments about potential near-term volatility in e-commerce as a key concern. Chief Financial Officer   ( CFO )   Toby Xu said on the earnings call that customer management revenue   ( CMR ) growth may slow due to intensified competition and base effects from payment service fees introduced last September.

"You can expect short-term fluctuations in CMR and profitability," Xu told   analysts, adding that the company's priority remains capturing long-term market share through continued investment in consumers and merchants.

Goldman Sachs analysts attributed the negative stock reaction to this guidance, noting that while AI-driven cloud results reinforced the year's valuation rerating, investor worries about e-commerce intensified. The firm said concerns centered on "more intense competition and user reinvestment" alongside high base effects.

Bloomberg Intelligence analysts Catherine Lim and Jason Zhu commented that Alibaba will sacrifice margin gains in e-commerce through fiscal year 2026 to capture more mainland spending via accelerated expansion into quick commerce and AI-related services. "An increase in capital expenditures will likely require Alibaba to pare buybacks and dividends," they wrote.