Alibaba Shares Slide as E-commerce Warnings Overshadow AI Surge, Goldman Says

Alibaba saw its stock reverse gains to close lower on Tuesday in US trading following its earnings release, as management warnings regarding volatility in its core e-commerce business overshadowed better-than-expected performance in cloud computing and artificial intelligence.

Goldman Sachs attributed the reversal—which saw shares swing from a 4% pre-market gain to a close down more than 2%—to renewed investor anxiety over the company’s retail outlook. The selloff was triggered by comments during the earnings call indicating that Customer Management Revenue (CMR) and profits could face near-term fluctuations due to intensifying competition and increased reinvestment in users.

Chief Financial Officer Toby Xu stated that the company anticipates "short-term fluctuations in customer management revenue and profits" as it prioritizes market share through decisive investments in merchants and consumers. Additionally, analysts noted that revenue growth rates are expected to decelerate starting next quarter due to the fading base effect of payment service fees introduced last September.

Despite the retail headwinds, the technology giant delivered a robust performance in its cloud division, driven by surging demand for AI infrastructure. Goldman Sachs highlighted that Alibaba's aggressive capital expenditure and revenue growth in AI services exceeded expectations, reinforcing the company’s long-term structural shift toward technology-driven growth.

E-commerce Instability Concerns

According to a report by Goldman Sachs cited by market sources, the negative market reaction was primarily driven by the contrast between the "AI plus Cloud" narrative and the uncertain outlook for the domestic e-commerce sector. The bank noted that while AI valuation models are being re-rated upwards, investors are increasingly wary of the competitive landscape facing Alibaba's Taobao and Tmall Group.

Management emphasized that their primary objective is to secure mid-to-long-term market share. To achieve this, the company plans to upgrade its e-commerce business model and continue investing heavily. While this strategy aims to fortify Alibaba’s market position, it implies that Earnings Before Interest, Taxes, and Amortization (EBITA) for the China e-commerce segment may experience quarterly volatility.

The expiration of the high base effect from software service fees was also flagged as a technical factor that will optically slow growth metrics in the coming quarters, adding to the cautious sentiment.

Aggressive AI Spending and Cloud Growth

In sharp contrast to the retail gloom, Alibaba’s cloud and AI operations emerged as the quarter’s standout performers. Cloud intelligence revenue grew 34% year-on-year, surpassing the 31% growth forecast by Goldman Sachs. Notably, AI-related revenue now accounts for 20% of external customer revenue and has recorded triple-digit growth for nine consecutive quarters.

Goldman Sachs pointed to Alibaba’s surging capital expenditure (CapEx) as evidence of its commitment to AI leadership. The company’s CapEx for the quarter jumped 80% year-on-year to RMB 32 billion (US$4.4 billion). Analysts contrasted this with rivals like Tencent, whose capital spending declined over the same period.

Alibaba management hinted that their previously announced three-year investment target of RMB 380 billion (US$52.4 billion) "might be too small," suggesting potential upward revisions to fund future growth. Goldman Sachs likened Alibaba’s full-stack AI capabilities and infrastructure build-out to Google’s strategy with its dedicated TPUs, forecasting cloud revenue growth to accelerate to 38% and 37% in the December and March quarters, respectively.

Valuation Adjustment

Reflecting the mixed outlook, Goldman Sachs adjusted its valuation model for the tech giant. The bank lowered its 12-month target price for Alibaba from US 205 to US 197 (HK 199 to HK 192), citing a valuation markdown for the domestic e-commerce business.

However, the investment bank maintained a "Buy" rating on the stock. Analysts argued that the valuation for the cloud business remains intact and that the "AI-driven story line is still well-preserved."

In its base case scenario, Goldman Sachs assumes that Alibaba’s AI and cloud businesses will maintain their leadership position in China, while the core e-commerce profits will eventually stabilize. The bank also projects that losses in the immediate retail business will narrow in future quarters, and suggested that the market may be currently underestimating the potential of Alibaba's international cloud expansion.