Alibaba is one of the hottest AI stocks in the market in 2025, with shares up more than 60% year-to-date. The surge in price is due to Q3 results showing Cloud revenue accelerated with AI revenue up triple-digits for a sixth quarter in a row. Notably, the triple digit growth is on much lower revenue than what United States Big Tech companies are reporting, with leader Microsoft at 13X higher AI revenue. AI is also not meaningfully contributing to revenue nor earnings despite six consecutive quarters of triple digit growth. 

Despite the advancements that Alibaba is making in AI and tens of billions it is committing to invest in AI infrastructure, AI remains but a small portion of Cloud revenue, far below the scale of US-based peers. An ultra-competitive Chinese AI market engaging in a pricing war likely is hindering the country’s  AI growth potential, as Alibaba is touting tens of thousands of users and millions of downloads with small dollar growth to show for it. I break this down and more below. 

Alibaba has Made Visible AI Advancements 

Alibaba remains committed to its dual-prong strategy of e-commerce and AI + cloud. The company has recently highlighted multiple advancements on the AI front, with a handful of its models showing “industry-leading” performance. Shares rose again on Tuesday as Alibaba struck a partnership with Manus AI to roll out a Chinese version of Manus’ rapidly popular AI agent.  

China’s AI market is rapidly heating up with fierce competition from Alibaba, DeepSeek, Baidu, Tencent and Bytedance, among others. Alibaba is aiming to take a leading position in the AI market and announced recently that its Qwen2.5-Max mixture-of-experts model outperforms DeepSeek’s V3, Meta’s Llama 3.1 and OpenAI’s GPT-4o. In Q3’s earnings call, Alibaba teased the release of a new deep reasoning model built on Qwen 2.5 Max. 

Alibaba says its Qwen model outperforms DeepSeek’s V3 and Llama 3.1-405B across major benchmarks. 

Last week, Alibaba announced a new 32 billion parameter reasoning model, QwQ-32B, that it says outperforms DeepSeek’s R1 reasoning model, with 1/20th the parameters. QwQ-32B is the latest iteration of QwQ, which was first launched in November 2024 and “designed to enhance logical reasoning and planning by reviewing and refining its own responses during inference,” which a report from VentureBeat says allowed it to outperform OpenAI’s o1 on math benchmarks AIME and MATH, and scientific reasoning tasks. 

Alibaba is committed to expanding access to its AI models and tools, with its Qwen-2.5 series of models available via APIs as well as its genAI development platform Model Studio. Developers also can access Alibaba’s family of multimodal models – its vision understanding model Qwen-VL, its visual generation model Wanx2.1, its audio language model Qwen-Audio, and its coding assistance model Qwen-2.5coder.  

In Q3’s earnings call, Alibaba’s management highlighted that this approach is paying off, with more than 90,000 Qwen-based derivative models developed globally at the end of January, which made Qwen “the most popular among developers across the major model families.” Management added that more than 290,000 companies and developers accessed Qwen APIs through Alibaba Cloud's Bailian platform. 

Alibaba Outlines Significant Capex Outlay to Support AI 

To support its growth in AI and become a competitive global player, Alibaba outlined a plan to “aggressively invest in AI infrastructure,” with planned capex over the next three years exceeding what it has spent over the last decade. Management’s plan calls for spending of 380 billion yuan, or ~$52.4 billion, over the next three years predominantly for AI.  

Management first discussed increasing capex in the June 2024 quarter, when expenditures nearly doubled YoY to ~12 billion yuan, or $1.6 billion. Management noted in the June quarter that confidence in this level of investment was driven by strong demand, and expected to stay around this level for the next few quarters. 

However, capex quickly accelerated -- in the September 2024 quarter, capex rose more than 310% YoY to 16.9 billion yuan, or $2.4 billion, and in the December 2024 quarter, capex rose 330% YoY to 31.4 billion yuan, or $4.3 billion. For the nine months of this fiscal year, capex totaled 60.3 billion yuan, or $8.3 billion, rising more than 246% YoY. 

Capex Plans Well Below US Big Tech 

This 30 billion yuan/quarter rate is a bare minimum of what’s needed to come close to management’s spending targets, signaling heightened capex will continue for the foreseeable future. However, at $52.4 billion over the next three years, Alibaba is spending only a fraction of what US Big Tech firms are spending, which could impact its competitive positioning.  

For 2025, Amazon, Microsoft, Meta and Alphabet outlined plans for approximately $320 billion in capex, predominantly for AI, which is 6x more than what Alibaba is spending. Of the four, Meta has earmarked the least towards capex, at $60-65 billion, but even at the low end, Meta’s one-year spending is more than 15% higher than Alibaba’s 3-year plan. 

In 2024 and 2025, Big Tech is on track to spend more than $550 billion in capex, or more than 10x higher than Alibaba’s plan in just two years as opposed to three. So while Alibaba’s AI spending commitment looks high compared to its historical investments, it’s spending just a mere fraction of what Big Tech is. The US is not likely to back down when it comes to AI dominance, which we covered in the article “DeepSeek Creates Buying Opportunity for Nvidia Stock.” 

Alibaba Remaining Competitive on AI Pricing 

China’s AI market is engaged in much fiercer competition than in the US, and this is evident within the pricing structures of AI models. Alibaba and rivals are pricing models at mere fractions of the cost of US-based competitors, in an effort to win over customers from each other and remain ahead in the broader global AI race.  

China’s AI market has been in a pricing war since early 2024 – Alibaba had cut prices by up to 97% in May 2024. ByteDance further intensified the price war in December 2024, when it slashed prices for its new Doubao model with vision understanding capabilities to $0.00041 per 1,000 tokens, 85% lower than the industry average. Alibaba mirrored this move within two weeks, matching Doubao’s $0.00041 price for its Qwen-VL Max model. 

Alibaba’s Qwen models are priced much cheaper than leading models from OpenAI and Anthropic as China engages in an AI pricing war. 

Alibaba’s Qwen2.5 Max is priced at $0.0016 per 1,000 input tokens and $0.0064 per 1,000 output tokens, while its Qwen Plus is offered at $0.0004 per 1,000 input tokens and $0.0012 per 1,000 output tokens. Qwen Turbo is priced at $0.00005 per 1,000 input tokens and $0.0002 per 1,000 output tokens. 

For comparison, ByteDance’s Doubao 1.5 Pro is priced at $0.00011 per 1,000 input tokens and $0.00028 per 1,000 output tokens. DeepSeek’s V3 model is priced $0.00014 per 1,000 input tokens and $0.00029 per 1,000 output tokens, while its R1 models is priced higher at $0.00057 per 1,000 input tokens and $0.00227 per 1,000 output tokens. Baidu recently announced that it is aiming to make Ernie free for all users by the start of April this year.  

This pricing structure is allowing Alibaba to remain quite competitive in the Chinese AI market and more so on the global market, as China’s models are significantly cheaper than OpenAI, Anthropic and others, with Meta and Mistral two of the lower-cost competitors.  

OpenAI’s GPT 4.5 is currently one of the most expensive models available, at $0.075 per 1,000 input tokens and $0.15 per 1,000 output tokens – that’s up to almost 50x more expensive that Qwen2.5 Max. OpenAI’s o1 is priced at $0.0015 per 1,000 input tokens and $0.06 per 1,000 output tokens, while the much smaller GPT 4o mini is priced comparatively to Chinese rivals. 

Pricing is Alibaba Stock’s Achilles Heel for AI 

However, it is this pricing structure and ongoing price war in China’s AI model market that is Alibaba’s Achilles heel. While the low-cost structure is enabling Alibaba to remain extremely competitive in the face of rising competition both domestically and globally, it’s serving as a bit of a hindrance to growth, with AI revenue likely still quite below the $1 billion mark, where US tech giants are touting multi-billion dollar AI revenue streams.

Alibaba first outlined the growing demand for AI model training and AI infrastructure services in its June 2023 quarter. The following quarter in September 2023, Alibaba laid out a two-pronged strategy for driving AI growth in the cloud. 

Management said that they will aim to “build the most open cloud in the AI era, providing stable and efficient AI infrastructure for all industries and enabling all sectors to go intelligent,” and “build an open and prosperous AI ecosystem.” This was underscored by its Qwen family of models, its model application development platform Bailian, and its open-source platform ModelScope. The September quarter saw ModelScope’s cumulative downloads more than double sequentially, from 45 million in July 2023 to 100 million, attracting more than 2.8 million developers. 

Discussing the March 2024 quarter results, CEO Eddie Wu explained that AI is serving as a primary driver for the revenue growth that is being seen in the broader Cloud segment: 

“If you look at the overall revenue growth of the Cloud business today, most of that is already being driven, I would say by AI and AI-related new products. So going forward a lot of the incremental growth we can expect to see in the Cloud business will be related to investments the customers are making in AI. But also there is a complementary effect because the more that customers invest in and make use of AI the more demand they will also have for other of our various cloud offerings.”  

For the December 2024 quarter, Cloud Intelligence revenue accelerated 6 points sequentially to 13% YoY to  ¥31,742 million, or $4.35 billion, up from 7% growth in the September quarter. This marks the steepest sequential increase in what has been a rather gradual acceleration from 2% YoY growth in the September 2023 quarter.  

Alibaba stock’s Cloud revenue growth accelerated to 13% YoY in the December quarter, aided by AI. 

In its December 2024 quarter results, Alibaba noted that AI product revenue “maintained triple-digit year-over-year growth for the sixth consecutive quarter,” starting in the September 2023 quarter. AI helped drive an acceleration to the double-digits for Cloud Intelligence revenue growth.  

There are a handful of stats that support increasing adoption of Alibaba’s AI products – more than 90,000 Qwen-based derivative models had been developed globally at the end of January, while more than 290,000 companies and developers have accessed Qwen APIs through Alibaba Cloud's Bailian platform. Qwen’s models have been downloaded more than 7 million times, and ModelScope has attracted more than 4,000 AI models and 5 million developers.

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Yet despite this and six quarters of triple-digit growth, Cloud revenue is only growing in the low-double digits, implying that AI’s contribution to revenue remains quite small. A rough estimate places AI’s contribution in the mid-single digit percentage of Cloud revenue, with revenue possibly around the $200-275 million range as of the December quarter. This would put Alibaba’s AI run rate between $800 million to $1 billion.   

Compare this to Microsoft, where its AI run rate on Azure surpassed $13 billion last quarter, up 175% YoY. Microsoft is also showing rapid growth for AI platforms and tools – the number of Azure OpenAI apps running on Azure databases more than doubled YoY last quarter, while Azure AI Foundry reached 200,000 MAUs within two months. Microsoft’s Phi family of small language models have been downloaded more than 20 million times, nearly 3x more than Qwen. 160,000 organizations have used Microsoft’s Copilot Studio, creating 400,000 custom agents last quarter, up 2x QoQ. 

AI’s Impact on Alibaba’s Cloud Margins 

Alibaba noted last quarter that a shift to higher-margin cloud products, including AI, has aided EBITA growth in its Cloud segment. For the December quarter, adjusted EBITA rose 33% YoY to  ¥3,138 million, or $430 million, decelerating dramatically from 89% YoY and 155% YoY growth in the prior two quarters.  

Adjusted EBITA margin was 9.9% in the December quarter, up from 9% in the prior quarter. It’s hard to argue against the beneficial impact of AI on EBITA margin for Cloud, with margins beginning to expand significantly as AI embarked on its six-quarter stretch of triple digit growth in the September 2023 quarter, aside from a hiccup in the March 2024 quarter. Since that point, margin have risen nearly 5 points and are knocking on the double-digit range. 

Alibaba stock’s Cloud adjusted EBITA margins have expanded as AI drives a shift to higher-margin products.  

Despite the margin expansion and strong EBITA growth from a shift in product mix towards higher-margin cloud offerings and AI products, Cloud’s share of consolidated adjusted EBITA is still quite small. For the last four quarters, Cloud’s share has hovered between 5% to 6.6% of consolidated adjusted EBITA. While this was an improvement from 0.9% in the June 2023 quarter and 3.3% to 4.5% in the second half of 2023, segment adjusted EBITA growth has decelerated sharply to the lowest level in the past seven quarters, suggesting EBITA contribution may follow and plateau.  

Alibaba’s Cloud Intelligence adjusted EBITA growth has decelerated more than 120 points in two quarters to 33% YoY. 

What this means is that despite the six-quarter string of triple-digit growth for AI revenue, there’s minimal impact to the bottom line from this AI revenue surge at the moment. Earnings estimates for this fiscal year and next were relatively unchanged through much of the second half of 2024, within a 3% range, only rising in February following a 10% earnings beat in the December quarter.  

Alibaba’s EPS estimates for this fiscal year and next were relatively unchanged through most of 2024 despite AI growth. Source: YCharts 

AI revenue is not yet at the scale where it is meaningfully contributing to revenue or earnings, though Alibaba’s commitment to spend significantly on AI after witnessing six quarter of triple-digit growth is more positive for the long-term rather than the short term.  

Valuation Reaching a Peak 

Because AI is not driving the revenue scale or profits that we are seeing here with US Big Tech, Alibaba’s valuation is getting pricey, trading at peak levels from the past three years. Alibaba not only is facing tough competition from Big Tech but also from within domestic peers, with Tencent and Baidu both reporting strong AI growth.  

Alibaba is trading at peak valuation levels from the past three years. Source: YCharts 

Alibaba is currently trading at 15.1x forward earnings and 2.35x forward revenue, both at or just below peak valuations since early 2022. This rapid rerating has likely been driven predominantly by AI enthusiasm, given that a majority of the multiple expansion occurred following DeepSeek’s rout in late January.  

For comparison, Baidu trades at a 40% discount to Alibaba on both metrics, at 9x forward earnings and 1.7x forward revenue, with its AI Cloud revenue rising 26% YoY, double the rate of Alibaba’s. Baidu’s Ernie handled 1.65 billion daily API calls in December 2024, with external API calls up 178% QoQ. Baidu’s Wenku platform reached 94 million MAUs, up 216% YoY and 83% QoQ.  

There’s also risk that China remains behind the US when it comes to AI and monetization, with  Tencent VP Martin Lau laying out three reasons why it lags behind US peers despite AI revenue reaching 10% of Cloud revenue. He explained that China does not have nearly as large as an enterprise market as the US, and within that, the SaaS ecosystem “is not really that vibrant in China.” He added that fewer AI startups in China are purchasing less compute, another reason the US leads. These three reasons are why Lau believes that AI revenue is starting to scale, but not exploding as it is in US.  

Conclusion

Alibaba is one of AI’s top winners so far in 2025 with shares rising more than 60% YTD on AI enthusiasm as the giant has released highly-competitive Qwen models and struck partnerships with leading Chinese AI firms. However, the rally is likely front-running AI revenue to a significant degree, as Cloud’s low growth and management’s comments about AI revenue imply that AI is still growing off quite a small base. 

Alibaba is quickly ramping AI investments to better compete on the global scale, but its AI run rate far lags that of US peers, with Microsoft recently reporting 175% YoY growth to a $13 billion AI run rate and Amazon and Google both reporting in the multi-billion dollars. Alibaba has a lot of ground to cover to get into the same realm as Big Tech on AI, as its AI run rate is still likely below the $1 billion mark. 

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Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

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