Alibaba Group Holding Ltd. posted better-than-projected 34% revenue growth in its cloud business, offsetting a plunge in profit after the company unleashed spending on consumer subsidies and data centers to ride an AI boom.

The cloud division, which houses the flagship Qwen platform, propelled overall revenue 5% higher to 247.8 billion yuan ($35 billion) in the September quarter, just outstripping expectations. It posted a 16% rise in Chinese e-commerce revenue, suggesting it was holding its own in a three-way battle with JD.com Inc. and Meituan — one that compressed margins and halved its net income. The company’s U.S. shares fell more than 2%.

Alibaba’s report emerges against a backdrop of growing doubt about the sustainability of investment in AI infrastructure — without a clear path to profitability. On Tuesday, Chief Executive Officer Eddie Wu dismissed concerns about a sector investment bubble — stoked in part by the circular nature of data center financing. In fact, Wu said the Chinese company plans to explore “aggressive” investment to keep pace with surging market demand and ferocious competition in a fast-changing environment.

Alibaba, seeking to become a leader in artificial intelligence development, has accelerated the release of AI models this year. That culminated in the relaunch of its Qwen mobile app — an effort to replicate the success of OpenAI’s ChatGPT that got off to a fast start this month.

“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.

Wu’s comments stand in contrast to warnings from Chairman Joe Tsai just in March, when he flagged overinvestment from the likes of Amazon.com Inc., Microsoft Corp. and Meta Platforms Inc. Their shares have sagged over the past month as concerns mount about whether data center construction may be outpacing demand over time.

Alibaba joins JD.com and PDD Holdings Inc. in reporting better-than-anticipated results, boosted by Beijing’s stimulus measures and billions of dollars in subsidies as they vie for shoppers and diners.

But that cut into profitability: Net income dived to 20.99 billion yuan during the period — reflecting not just discounting but also the mounting costs of AI development. Sales and marketing expenses more than doubled in the quarter.

What Bloomberg Intelligence says

Alibaba will sacrifice margin gains in e-commerce and other consumption-related businesses in China through the fiscal year ending March 2026. The company is poised to forgo some profit to capture more mainland spending via an accelerated expansion into food and on-demand (quick commerce), cloud and AI-related products and services. This will keep spending elevated over the next four months on user and merchant acquisitions, technology-led process upgrades, AI-related development and logistics solutions. An increase in capital expenditures will likely require Alibaba to pare buybacks and dividends.

— Catherine Lim and Jason Zhu, analysts

Chinese firms have weathered a global AI stock selloff better, in part because their spending plans are still comparatively modest. Yet Alibaba’s — at 380 billion yuan over three years — sets it apart from much of the domestic competition. Tencent Holdings Ltd. committed roughly $1.8 billion toward capital expenditure in the most recent quarter.

On the surface, Alibaba’s ambitions appear more aggressive. Its revamped Qwen mobile app attracted 10 million users within four days — one of the fastest rollouts of any Chinese AI service — and Alibaba said the plan is to build it into a full-fledged AI agent that can handle tasks like shopping on Taobao. Qwen is set to gradually incorporate features like mapping, shopping, travel booking and education, with the goal of building a broader ecosystem.

Investors have so far cheered that ambition. The Hangzhou-based company’s shares have nearly doubled in value since the start of the year — though in the long run it’ll have to sustain rapid cloud revenue growth and fight off just about China’s entire internet sector, spanning startups such as DeepSeek to tech giants like ByteDance Ltd.

While U.S. players like OpenAI or Alphabet Inc.’s Google remain shut out of China, Qwen has to contend with local rivals.

ByteDance’s Doubao chatbot already has over 172 million monthly active users, according to QuestMobile data. Tencent is leveraging WeChat to promote its own Yuanbao, while laying out plans to build the ubiquitous WeChat into an agentic AI-capable service. And consumer-facing apps have yet to show a clear path to revenue generation in China, where users have shown little appetite to pay for subscriptions.

Still, the country’s biggest tech companies are hampered by U.S. restrictions on the most advanced Nvidia Corp. chips. Supply of domestic alternatives is limited. That hinders AI development, though Alibaba and local firms like Huawei Technologies Co. are seeking to develop homegrown accelerators.

Wu again set out plans to build a “full-stack” suite for AI development, from advanced models to the infrastructure — such as semiconductors — required to build them. The company’s chip unit, T-Head, has made headway in efforts to compete with Huawei.

More broadly, executives flagged signs of recovery in Chinese consumption through quick commerce — fast-delivery of goods and meals — which in turn drives traffic to its other platforms. They reaffirmed a target of expanding gross merchandise value from quick-commerce to 1 trillion yuan in about three years.

Alibaba’s ability to control costs around consumer services while investing in cloud operations is something investors will monitor over the longer term.

“Our Alibaba Cloud server infrastructure is seriously lagging behind the growth rate of customer orders. Our backlog of orders continues to expand,” Wu said.

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With assistance from Zheping Huang, Claire Che, Henry Ren, Debby Wu, Ville Heiskanen and Nick Turner.

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