Alibaba (BABA) stock has recently returned to the radar of many investors. After experiencing regulatory headwinds and stock price declines during the pandemic, its share price has staged a significant rebound since mid-2024, more than doubling. However, given this volatile recovery, a deep understanding of its core business composition, growth drivers, and current financial situation is crucial.
Alibaba’s foundation lies in e-commerce. It launched the consumer-facing Taobao platform as early as 2003, followed by the Tmall platform for brands and businesses in 2008. These two platforms quickly gained widespread market acceptance and established the company’s core strength. According to DBS Bank analysis, the combined Gross Merchandise Volume of Tmall and Taobao accounts for approximately 40% of the entire Chinese e-commerce market. Although the company has expanded into areas like cloud computing, logistics, digital media, and international e-commerce, the e-commerce segment remains its most important profit source to date. In the last fiscal quarter, Tmall and Taobao together contributed nearly half of the company’s total revenue of $18.6 billion, highlighting the continued cash-generating ability of its core business.
While the e-commerce business contributes the majority of profits, Alibaba’s greatest future growth potential likely comes from its Cloud Intelligence Group. This segment offers a suite of artificial intelligence solutions and achieved 34% year-over-year growth in the quarter ending September. This robust growth was largely driven by the increasing adoption of its self-developed large AI model “Qwen,” whose performance is considered competitive with leading international products like OpenAI’s ChatGPT and Google’s Gemini. Furthermore, Alibaba’s innovation extends beyond software into AI hardware. In August this year, the company launched its self-developed AI processor, whose performance rivals products from industry leader Nvidia. These technological developments position Alibaba favorably within the Chinese AI market. Morgan Stanley predicts that China’s AI market could reach a staggering $1.4 trillion by 2030, providing ample room for the long-term development of Alibaba’s cloud business.
Despite Alibaba’s strategic positioning in key growth areas, its recent financial reports also reveal challenges facing short-term profitability. The company’s latest quarterly report showed that while total revenue increased 5% year-over-year, net profit plummeted 85%. It is noteworthy that the primary reason for the profit pressure was not high investment in emerging businesses like AI. In fact, the Cloud Intelligence Group’s EBITDA grew 35% during the same period. The root cause of the profit decline lies in its mature e-commerce business, where profitability was significantly squeezed due to massive investments in areas like “quick commerce” delivery (particularly food delivery services), leading to a sharp 76% drop in adjusted EBITA. Morningstar analysts Chelsey Tam and Junhao Yang pointed out that price competition in the food delivery market could persist until the end of 2027, suggesting that the company’s overall net profit might remain suppressed in the medium term.
While navigating these challenges, Alibaba maintains a solid financial position. Currently, the market’s valuation of Alibaba appears to factor in expectations for its short-term difficulties. Its price-to-earnings ratio is below 16 times analysts’ earnings per share forecasts for the 2026 fiscal year. Although analysts expect modest revenue growth (around 3%) and profitability pressure in the current fiscal quarter, Wall Street generally predicts revenue growth will accelerate in the next fiscal year, with net profit potentially rebounding at an even faster pace. Although the stock price has risen about 80% over the past year, it has retreated approximately 20% from its early October high, providing a window for investors to conduct in-depth research and evaluation.
