Alibaba drops over 6% after earnings, hitting a new low for over half a year; Wall Street: the short-term "profit reset" is to prepare for a long-term AI surge

On March 20, Alibaba’s stock dropped over 6% during trading, touching a low of HKD 123.5, the lowest since August last year; in the U.S. stock market overnight, Alibaba closed down over 7% at $124.9.

In terms of news, Alibaba announced that its third-quarter revenue increased 2% year-over-year to RMB 284.843 billion, below market expectations of RMB 289.795 billion; net profit attributable to ordinary shareholders declined 67% YoY to RMB 16.322 billion, and adjusted net profit also fell 67% YoY to RMB 16.71 billion, well below the market forecast of RMB 29.579 billion. The overall profit decline was mainly due to investments in instant retail, user experience, and technology. During the period, sales and marketing expenses as a percentage of revenue surged from 15% to 25% compared to the same period last year. Domestic e-commerce business faced pressure, with customer management (CMR) revenue growth slowing to 1%, reaching RMB 102.664 billion. Free cash flow (non-GAAP measure) was only RMB 11.35 billion, down 71% YoY.

How to interpret Alibaba’s “revenue growth but profit decline”? After the earnings release, China International Capital Corporation (CICC) lowered Alibaba’s target prices by 13% to HKD 172 and by 13% to $178 in the U.S., maintaining a “market outperform” rating. The firm indicated that in the medium to long term, widespread adoption of Agent, AI model iterations, and AI commercialization efforts could support revenue growth, but the company’s guidance of $100 billion in external cloud and AI revenue over five years remains to be validated quarter by quarter; domestic consumption showed some improvement in Q1 2026, which may boost customer management revenue growth, but pressures on domestic and international e-commerce persist, mainly due to uncertainties in consumption and regulation, the phased withdrawal of government subsidies, and competitive pressures.

Wall Street investment banks characterize this as a “key profit reset,” noting it as an inevitable result of investments in AI and instant retail strategies. The biggest highlight in the earnings report is the explosive growth in AI data: Baolian API token consumption surged sixfold from December to March, and the Pingtouge chip’s annualized revenue reached hundreds of millions, with 60% supplied externally. Goldman Sachs expects Alibaba Cloud’s quarterly growth in March to reach 40%.