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After a rough four-year stretch, Alibaba (BABA) has been on fire in 2025, rocketing higher by nearly 60% on rising hopes that the China-based eCommerce and cloud computing company would see an AI-powered acceleration in growth. Today, however, shares are cooling off considerably after BABA disclosed on its own blog that it intends to invest at least RMB 380 bln in AI and cloud computing over the next three years. In the wake of Alphabet's (GOOG) mixed 4Q24 earnings report on February 4, shares of GOOG suffered a similar fate as the tech giant's whopping FY25 capex guidance of $75.0 bln created plenty of angst among investors.
- A heightened level of scrutiny regarding companies' exorbitant spending plans around AI has intensified during this current earnings season as investors question the potential return on investment. Those concerns were front and center on January 20 when DeepSeek-R1 was released to the public. The Chinese AI model and chatbot was reportedly developed for a fraction of the cost it took to develop OpenAI's ChatGPT, leaving many to wonder if pouring tens of billions into AI investments is a wise use of capital.
- For BABA, the company's investments are beginning to pay off, although the upswing in growth hasn't been too dramatic just yet. In Q3, total revenue growth accelerated to 7.6% from 5.2% in Q2, driven by a 13% increase for BABA's Cloud Intelligence Group. That marked the unit's fastest growth in three years.
- This acceleration in growth is being driven by AI-related products, which achieved triple-digit yr/yr growth for the sixth consecutive quarter. Among those products, BABA's Qwen-VL -- a large language model-based AI assistant -- is especially providing a boost. In the coming months, BABA is expected to launch a new AI model that's built on its Qwen 2.5 LLM.
- Although BABA didn't provide a specific capex number in its Q3 earnings report, the closely linked net cash used in investing activities metric showed a substantial yr/yr increase. Specifically, for the nine months ended December 31, 2024, net cash used in investing activities jumped by 247% yr/yr to RMB 145.9 bln.
The main takeaway is that BABA's ambitious spending plans for FY25 are creating some anxiety that the company's bottom-line will take a sizable hit this year, negating the momentum that it has garnered. Following the stock's huge run higher to start 2025, shares were also due for a pullback and this development is providing the impetus to take some profits off the table.