Alibaba, China’s largest e-commerce firm, reported a modest 1.7% increase in third-quarter revenue, significantly below expectations. However, more concerning was the staggering 66.3% drop in net income, largely due to heavy spending on one-hour delivery and extensive promotional activities during peak shopping periods, which did not translate into higher demand as anticipated.
The company’s US-listed shares fell over 6% in early trading following the report. Alibaba’s revenue for the quarter, which ended in December, reached 284.84 billion yuan (US$41.28 billion), a far cry from the predicted 3.7% rise. The company’s adjusted earnings amounted to 7.09 yuan per American Depository Share, significantly below the estimated 11.64 yuan.
Focusing on AI Profitability
On a brighter note, Alibaba’s cloud revenue exceeded expectations, posting a growth of 36%. This growth was driven by the company’s aggressive integration of AI agents into the consumer-facing aspects of its business, along with increased investments.
The tech industry, both in China and globally, is closely monitoring the progress of AI monetization as firms grapple with turning this revolutionary technology into a profitable venture. In line with this, Alibaba recently announced its decision to segregate its AI businesses from its cloud computing division.
The newly created Alibaba Token Hub business group, under the leadership of CEO Eddie Wu, marks the company’s clear shift towards AI-based digital assistants. These AI models use significantly more tokens, or data units for generating language, compared to traditional Q&A chatbots.
Alibaba recently launched a pre-Chinese New Year promotional campaign featuring its chatbot Qwen. This has now evolved from answering questions to assisting consumers with ordering food and e-commerce products. This strategy led to a significant increase in daily active users to around 50 million. However, usage has since declined.
“Unfortunately, 30-day retention remains relatively low, as users are primarily engaging in general entertainment and consumer-related scenarios, which indicates low user loyalty,” commented Jamie Chen of Third Bridge.
CEO Eddie Wu shared the company’s ambitious vision during a call with analysts, stating, “Over the next five years, our goal is to surpass $100 billion in combined cloud and AI external revenue.”
The Impact of the Ongoing Property Crisis
By the end of last year, a drawn-out property crisis and income stability concerns continued to negatively impact consumer sentiment. This resulted in reduced spending, even during traditional periods of high expenditure.
Even an extended Singles’ Day sales event in November, that lasted over a month, received a lukewarm response. Retailers increased discounts and subsidies to boost spending, but cautious consumers and year-round deals diluted the event’s traditional sales spike.
Aggressive spending by Alibaba and JD to provide discounts and faster delivery to capture market share from food-delivery leader Meituan led to pressure on profit margins.
In upcoming quarters, the focus for Alibaba will be on improving unit economics for its Taobao Quick Commerce division. Executives have reiterated their aim to achieve a gross merchandise volume of 1 trillion yuan and predict that the business will turn profitable by the fiscal year 2029.
Questions & Answers
What were the Q3 results for Alibaba?
Alibaba reported a 1.7% rise in third-quarter revenue and a 66.3% drop in net income, both below analysts’ estimates.
What is Alibaba’s focus in the tech industry?
Alibaba is focusing on AI monetization, integrating AI agents into the consumer-facing side of its business, and separating its AI businesses from its cloud computing arm.
How did the property crisis affect Alibaba’s performance?
A prolonged property crisis and concerns about income stability weighed on consumer sentiment, limiting spending even during traditional periods of high expenditure. This resulted in lower-than-expected revenues for Alibaba.
