The revenue miss was not huge in absolute terms, but the market rarely gives points for effort. Alibaba’s 243 billion yuan in sales came in below LSEG consensus, even though the company still posted year-over-year growth, Reuters reported.

Domestic commerce helped cushion the blow. Revenue from the China home market reached 122 billion yuan and beat forecasts, while the international e-commerce business weakened, Reuters reported.

That split tells the story better than any slogan about growth. Alibaba is still generating sales, but it is doing so while funding two expensive fights at once, one in AI and one in instant delivery, Reuters reported.

The profit hit is also part of a pattern. In the December quarter, Alibaba’s adjusted profit fell 67% and both revenue and earnings missed consensus expectations, according to Jefferies analysts cited by Morningstar. That earlier miss sent ADRs down 7.1% overnight and Hong Kong shares 4.8% lower, Morningstar reported.

The case for patience starts with cloud. Revenue at Alibaba’s cloud division rose 38% to 41 billion yuan in the quarter, and AI-related products now make up 30% of external cloud revenue, Reuters reported.

That business has been gathering speed for a while. Revenue growth from external cloud and AI customers reached 35% in the December quarter, up from 29% in the prior quarter, and Alibaba expects that pace to keep accelerating, Morningstar noted in March.

Chief Executive Eddie Wu put a very large number on the table: over the next five years, Alibaba wants combined cloud and AI external revenue to top $100 billion, Morningstar reported. That target sits against cloud sales forecast at roughly $23 billion for the fiscal year ending March 2026, per Visible Alpha figures cited by Reuters Breakingviews.

Alibaba is also trying to turn AI into something people actually use inside its commerce empire. Its Qwen model has been integrated into Taobao and Tmall so shoppers can describe what they want in a chat window instead of clicking through product lists, Reuters reported. Earlier this year, Alibaba separated its AI operations from the cloud division and put them under a new unit overseen by Wu, Morningstar reported.

Alibaba’s problem is not just that profits are down. It is that the old business is no longer a fortress. Morningstar said Alibaba’s share of China’s online retail goods volume fell to 62% in the year ended March 2023, from 72% a year earlier, and that PDD overtook Alibaba’s annual active consumer count in fiscal 2021, Morningstar reported.

Douyin has been taking a slice too, especially in beauty and apparel, and has pushed into search-based e-commerce on Alibaba’s home turf, Morningstar said. Morningstar sees no quick fix for that erosion, which is one reason the company is leaning so hard into new growth areas.

That makes the spending look less like a choice than a response to pressure. Alibaba has also raised prices for AI services, Morningstar reported, a sign that the company is moving away from the race-to-the-bottom pricing that once defined parts of China’s AI market.

The balance sheet gives it room to try. Alibaba ended 2025 with a net cash position of $42.5 billion, which Morningstar said gives the company ample flexibility to fund AI and quick-commerce initiatives, Morningstar reported.

Bloomberg Intelligence has framed the same trade-off in starker terms. Ahead of these results, BI said Alibaba’s valuation depends more on later AI monetization than on immediate profit delivery, while weak domestic consumption in China adds to the uncertainty, Bloomberg reported. The same note said Tencent’s full-year earnings growth is expected to slow to the low-teens range as AI investments double.

Morningstar kept its $258 fair value estimate after the December-quarter miss and said the shares look undervalued, arguing that investors are leaning too hard on near-term earnings pain and not enough on possible AI monetization, Morningstar reported. It called the strategy of sacrificing near-term earnings for AI and quick-commerce leadership “strategically sound.”

Jefferies took a more measured but still constructive view. After the December quarter, it kept a buy rating, cut its Hong Kong price target to HK$206 from HK$218, and said food delivery losses were likely to narrow in the March quarter compared with the December period, Morningstar reported.

For now, investors are left with the same trade-off, only starker after this quarter. Alibaba has a growing cloud and AI business, but it is paying for that growth with lower margins and a more fragile core retail franchise. The next few quarters will show whether the spending starts to compound, or whether this is the sort of expensive confidence that markets only admire in hindsight.