Alibaba Earnings Preview: Takeout Price War Pressures Profits, Cloud Business and AI Shine

On August 29th, Friday before the U.S. stock market opens, Alibaba will release its financial report for the first fiscal quarter of fiscal year 2026 (referred to as the second quarter) ending June 30, 2025.

According to analyst forecasts from FactSet, Alibaba's second-quarter revenue is expected to grow by 5% year-on-year to 255.2 billion yuan (approximately 35.5 billion USD), while adjusted earnings per share (EPS) are expected to decline by 6% year-on-year to 2.16 USD.

As of Wednesday's close, Alibaba's U.S. stock has fallen about 17% from its peak in March. After the pullback in Alibaba's stock price, investors are closely watching whether the progress of its cloud computing and artificial intelligence (AI) businesses can become new catalysts. Key points of interest will include the growth momentum of Alibaba Cloud and AI, the impact of the flash purchase delivery price war on profits, and the effects of new business integration.

Although Alibaba's overall growth in the second quarter is expected to be moderate, the cloud business may achieve over 20% year-on-year growth, which will be the biggest highlight. Whether the International Digital Commerce Group (AIDC) can turn a profit as scheduled and the progress of the company's promised 53 billion USD investment in AI infrastructure are also key observation points.

The macroeconomic environment and the price war in the local life services sector are the main sources of pressure for Alibaba at present. The massive subsidies invested to cope with fierce competition are eroding Alibaba's profits in the short term. Several brokerages predict that Alibaba's overall profits will be significantly pressured due to the 50 billion yuan subsidy plan for Taobao flash purchases.

Guohai Securities predicts that Alibaba's total revenue in the second quarter is expected to reach 249 billion yuan, a year-on-year increase of 2%, but adjusted EBITA is expected to decline by 15% year-on-year to 38.2 billion yuan, with profit margins dropping to 15%. Dongfang Securities and Morgan Stanley also provided similar forecasts, believing that the merger of Taotian Group (TTG) and the local life group will lead to a significant decline in earnings before interest, taxes, depreciation, and amortization (EBITA) by 16%-20%.

Citi predicts that Alibaba's total revenue in the second quarter will reach 252.6 billion yuan, a year-on-year increase of 3.9%, but non-GAAP net profit is expected to decline to 32.1 billion yuan, mainly due to increased investment in the delivery business. Analysts from Bank of America and Citi remain optimistic about the cloud business, expecting growth of over 20%, but express concerns about the short-term profit margins of Taotian Group.

Cloud Business and AI: Growth Engines Continue to Power Forward

Analysts predict that Alibaba Cloud will continue to serve as the main engine of the company's growth. Citi expects cloud business revenue to grow by 21% year-on-year to 32.1 billion yuan, while Bank of America's forecast is similarly optimistic with a 25% growth rate for the cloud business.

In February of this year, Alibaba announced that it would invest over 380 billion yuan, more than 50 billion USD, over the next three years to build cloud and AI hardware infrastructure, exceeding the total of the past decade. According to a report from International Data Corporation (IDC) in early July, Alibaba Cloud holds a 23% market share in China's AI Infrastructure as a Service (IaaS) market, ranking first in the domestic market.

Alibaba's continued investment in the AI field is showing results, with the Tongyi Qianwen large model continuously upgrading and products like WebSailor network proxy being open-sourced one after another. Recently, China's AI newcomer DeepSeek released a new model that can run on domestically produced chips, boosting market confidence in the domestic AI ecosystem and bringing potential opportunities for Alibaba CloudCiti's research report believes that investors should focus on the growth momentum of AI-related demand and the progress of the Tongyi Qianwen model update. Although facing long-term challenges from U.S. chip export restrictions, the rapid implementation of domestic AI applications is expected to continue driving cloud business growth.

Citi expects Alibaba Cloud's EBITA profit margin in the second quarter to increase from 7% to 8%, reflecting an improvement in profitability driven by AI demand.

Bank of America expects cloud revenue in the second quarter to grow by 25% year-on-year, benefiting from strong AI demand and continued growth in capital expenditures. The adjusted EBITA profit margin for the cloud business is expected to be 8%, unchanged from the previous quarter.

Food Delivery Price War: Short-term Pain for Long-term Market Share

Faced with a slowing domestic consumption environment and strong competitors, Alibaba's core e-commerce business is adopting an aggressive investment strategy to capture users. The launch of Taobao Flash has sparked intense competition in the food delivery sector.

Since the launch of "Taobao Flash" on May 2, its daily order volume has surged from initially less than 30 million orders to over 100 million orders for three consecutive days during the promotional event from August 7 to 9.

However, this rapid growth has come at a heavy cost.

In early July, Alibaba announced it would invest 50 billion yuan in food delivery and instant delivery subsidies over the next 12 months. Bank of America estimates that in the second quarter alone, losses related to new businesses exceeded 10 billion yuan, assuming an average cost of 3-4 yuan per order. It is expected that related investments in the third quarter will exceed 20 billion yuan, pushing the average daily order volume for the quarter close to 70 million orders.

Citi's data shows that the daily active users and usage time of the Taobao App increased by 19% and 30%, respectively, proving that the investment is translating into user growth. More than 12,000 non-food brands have joined the platform, and the addition of well-known brands like Moutai has further enhanced the platform's attractiveness.

Bank of America believes that the period from July to November will be the peak investment period for Alibaba's food delivery business, with investments aimed at building consumer awareness, upgrading the supply chain, optimizing system algorithms, and testing cross-selling.

Business Integration: Synergy Effects Begin to Emerge

In June, Alibaba announced the integration of Ele.me and Fliggy into its China e-commerce business group, aiming to create a comprehensive consumption platform.

This integration has begun to show synergy effects. After the membership system was connected, users can accumulate points across different services, enhancing user stickiness and transaction frequency. New promotional activities like Super Saturday also reflect the effects of resource integration across the platform.

Citi expects the new Taotian Group (TTG), including Ele.me, to achieve revenue of 134.6 billion yuan in the second quarter, a year-on-year increase of 6.5%. Among them, consumer management revenue (CMR) is expected to grow by 10.3% year-on-year to 88.4 billion yuan. The EBITA of the new TTG is expected to decline by 18.4% year-on-year to 39.5 billion yuan, with a profit margin of 29.3%.

Profit Pressure: Inevitable Cost of Investment Cycle

Bank of America has significantly lowered its EBITA profit margin forecast for Taotian Group (TTG) from 41.2% to 34.2%, with the group's overall EBITA expected to decline by 15%. Considering the short-term profit disruption, Bank of America has reduced its annual adjusted net profit forecast for Alibaba for the 2026 fiscal year by 18%, to 135.4 billion yuanCiti predicts that after including Ele.me, the new TTG's EBITA will decline by 18.4% year-on-year to 39.5 billion yuan, with a profit margin of 29.3%. If it were the previous TTG, the EBITA is expected to decline by 15.5% to 41.2 billion yuan, with a profit margin of 34.2%.

However, the International Digital Commerce Group (AIDC) is expected to turn a profit, which will partially alleviate the profit pressure on the group. Management previously anticipated that this division would soon achieve quarterly profitability, helping to ease the overall profit pressure on the group and improve the overall profit margin.

AliExpress's strong performance in markets such as South Korea, along with the launch of new businesses like automotive sales, has injected new momentum into international operations.

Additionally, recent consumer stimulus measures introduced by the Chinese government, such as subsidies for consumer loans, may also indirectly benefit its domestic e-commerce business.

Despite these positive factors, Alibaba's valuation remains significantly lower than that of its international peers. According to FactSet data, its trading price is about 11.3 times the expected earnings for the fiscal year 2027, with a PEG ratio of only 0.55. Some analysts believe that its valuation is discounted by 50-70% compared to Western peers like Amazon.

This discount reflects the market's ongoing concerns about China's regulatory environment and geopolitical risks. Convincing investors with a clear path to profitability and technological leadership is a key challenge facing Alibaba's management.

Risks and Challenges

Investors need to pay attention to several major risk factors. First, the duration of the food delivery price war is uncertain, and excessive investment may impact long-term profitability. Second, the tense trade relations between China and the U.S. may still impact the company's international business.

Moreover, whether the massive spending on AI investments can be converted into actual returns remains to be seen. If there are restrictions on domestic chip technology, Alibaba's commitment to invest over $50 billion in AI infrastructure over the next three years may face technological bottlenecks.

Citi maintains a buy rating on Alibaba but gives a 30-day short-term negative outlook, with a target price of $148. Bank of America also maintains a buy rating, with a target price of $135. Analysts generally believe that despite short-term profit pressures, the company's leading position in cloud computing and AI, as well as the long-term potential of its food delivery business, support its investment value