Alibaba’s AI Ambitions Face Supply Challenge as Demand Soars

Alibaba Group is experiencing an extraordinary surge in growth that has caught investors by surprise, yet this positive development comes with a significant complication. The Chinese technology giant finds itself struggling to keep pace with overwhelming demand for its artificial intelligence services, creating a complex operational challenge even as its cloud business achieves remarkable expansion.

The company's Cloud Intelligence Group delivered spectacular second-quarter results, with revenue surging 34% to reach 39.8 billion yuan – significantly surpassing analyst expectations of 37.9 billion. Particularly noteworthy was the acceleration in growth momentum, building upon the 26% increase recorded in the previous quarter.

Chief Executive Eddie Wu identified the core issue clearly: customer demand for AI services currently exceeds Alibaba's deployment capabilities. The corporation cannot install new servers rapidly enough to match the breakneck pace of demand growth. Despite this challenge, Alibaba maintains a dominant 36% market share in China's AI cloud sector, leaving competitors including ByteDance, Huawei, and Tencent trailing far behind.

The company's AI product division has now achieved triple-digit growth for nine consecutive quarters. Alibaba's Qwen chatbot surpassed ten million downloads within its first week of public availability – positioning it as a direct competitor to OpenAI's ChatGPT in the Chinese market.

Ramping Up Capital Expenditure

Originally, Alibaba had allocated 380 billion yuan for AI and cloud infrastructure development over a three-year horizon. Wu has now indicated this budget may prove "somewhat insufficient," signaling that additional billions in investment likely lie ahead. The company has already deployed approximately 120 billion yuan toward expansion efforts during the past four quarters alone.

Should investors sell immediately? Or is it worth buying Alibaba?

This aggressive investment strategy has noticeably impacted financial performance. Adjusted EBITA plummeted 78% to 9.1 billion yuan, with the decline attributable not only to AI infrastructure spending but also to substantial expenditures in the quick commerce segment, where Alibaba is battling JD.com and Meituan for market dominance.

E-Commerce Performance Provides Counterbalance

While the cloud division expands profitably – recording a 35% increase in adjusted EBITA to 3.6 billion yuan – Alibaba's instant commerce operations continue to consume significant capital. This segment grew 60% and aims to achieve one trillion yuan in gross merchandise volume within three years, though intense price competition continues to pressure margins.

On a more positive note, the core China commerce business demonstrated renewed momentum with revenue climbing 16% to 132.6 billion yuan. Monthly active users on the Taobao application showed meaningful growth during the period.

Market analysts at Benchmark reaffirmed their buy recommendation with a $195 price target, suggesting potential upside of approximately 24% from current levels. The central question remains whether Alibaba can successfully manage simultaneous expansion in artificial intelligence while defending its e-commerce territory without permanently sacrificing profitability.