Alibaba’s Stock (BABA) Selloff Appears Driven by Costs, Not Demand

Alibaba (BABA) posted a weak December quarter, but the challenge was more about costs than demand. Margins collapsed under the weight of aggressive investments in artificial intelligence (AI), cloud, and quick commerce expansion, signaling a broader reset of the company’s cost structure and capital allocation. While cloud and AI scaling support long-term value creation, there are also execution risks and a longer path to margin recovery. Even with a seemingly “de-risked” valuation at current levels, I maintain a more cautious Hold rating.

Alibaba’s Weak Quarter Shocker

The headline news from Alibaba’s December quarter print was quite shocking — so much so that it’s no surprise it triggered a sharp sell-off, pushing the American Depositary Receipt (ADR) back near $120.

The Chinese e-commerce behemoth delivered not only a very weak quarter in terms of revenue growth of just 2%, but also massive declines in the bottom line, with adjusted EBITA falling 57% and net income shrinking 66% year-over-year. This led to a 49% year-over-year decline in operating cash flow and a further 71% drop in free cash flow — down to RMB 11.3 billion, roughly $1.6 billion.

One could ask: hasn’t Alibaba been investing heavily in AI infrastructure to make its cloud business more competitive and position itself as a relevant hyperscaler globally, especially within China? Indeed, capex ramped from $4.3 billion in 2024 to around $11.5 billion in 2025. The issue is that, alongside these investments, there was also a sharp increase in sales, general and administrative (SG&A), and other operating expenses over the last 12 months.

This isn’t a cloud problem. The AI and Cloud segments remain strong, growing revenue by 36% and adjusted EBITA by about 25%. The real drag is quick commerce. While quick commerce revenues grew 56% year-over-year in the December quarter, Alibaba’s overall e-commerce business saw adjusted EBITA decline 43% year-over-year. This is largely because quick commerce is forcing Alibaba to aggressively pursue market share through heavy subsidies, such as free shipping and discounts, and exorbitant logistics costs — both of which are showing up clearly in SG&A and other operating expenses.

Alibaba Is Balancing Growth, Defense, and AI

I would argue that the main issue that really caused Alibaba’s market value to plummet recently was much more a shift in perception — from a business that once had a highly profitable platform with relatively controlled SG&A, to one where SG&A has become a lever for growth, and defense against competition, namely Pinduoduo (PDD) and JD.com (JD).

Basically, I’d say Alibaba today is juggling three priorities at once: building an AI platform; financing growth in quick commerce; and defending market share in its core business. Naturally, all of this pushes the company into an extremely cost-intensive phase, and margins are likely to remain heavily compressed — as the December quarter clearly showed.

The counterargument to the bearish thesis is that this is simply a transitory stage, and more importantly, that AI could become a major growth catalyst for the cloud business — especially as management is guiding toward $100 billion in combined external cloud and AI revenue over the next five years. That opportunity would likely be driven not only by public cloud infrastructure but also by Alibaba’s ability to evolve into a broader Model-as-a-Service platform through Qwen, which is essentially Alibaba’s version of ChatGPT or Gemini, integrating foundation models, agentic AI capabilities, and enterprise workflows into a unified ecosystem.

That being said, the market currently expects Alibaba to deliver around $149 billion in revenue for FY26, with one quarter still to go, implying just 7.8% growth. Looking ahead, however, revenue growth is forecast to accelerate to 11.6% in FY27 and roughly 11% thereafter. Earnings per share (EPS) is expected to grow about 60% year-over-year, recovering from the nearly 45% year-over-year decline currently expected for FY26.

Valuation Looks Stretched Today, But Normalizes as Earnings Recover

From a valuation perspective, Alibaba’s recent earnings multiples appear distorted by sharp, likely temporary declines in profitability. The company currently trades at nearly 21x trailing earnings, about 60% above BABA’s five-year average. That said, as AI investments begin to meaningfully flow into the bottom line, BABA is expected to trade at 13.4x and 11.8x earnings in FY27 and FY28, respectively.

The outlook from firms like Morgan Stanley (MS) labels BABA as a “top pick.” This, along with its positioning as a potential AI winner in China with a top-tier full-stack AI platform, supports these multiples, implying significant long-term growth optionality within the thesis. I tend to see it the same way, with the caveat that a meaningful portion of the current investment cycle is not directed solely toward high-return AI initiatives. It is also directed toward structurally lower-margin segments such as quick commerce, as well as defensive spending in core e-commerce, which may ultimately delay a more material re-rating, as we’ve seen following the December quarter.

Is BABA a Buy, According to Wall Street Analysts?

The consensus on Alibaba’s shares remains very bullish, with 15 of 17 analysts over the past three months rating the ADR a Buy, while the remaining two rate it a Hold. Although analysts trimmed their price targets following the December quarter results, the average price target still stands at $188.38 — implying roughly 50% upside from current levels.

Constructive Long Term, But Waiting for Confirmation

I’m quite pleased to see Alibaba sparing no effort in building its cloud business and increasingly positioning itself as a relevant global hyperscaler, especially within the Chinese market. At the same time, the company appears to be managing a parallel investment cycle in its e-commerce business, which is consuming significant cash and materially impacting cash flow.

If execution goes as planned, I believe BABA is trading at fairly de-risked multiples at current prices. That being said, I would still like to see a few more quarters of confirmation that both top and bottom-line growth can resume at a more constructive pace. For now, I rate BABA as a Hold.