AI shapes the soul, consumption shapes the roots, has Alibaba finally stood up?

$Alibaba(BABA.US) released its 2QF26 earnings before the U.S. stock market opened on November 25. The two most concerning issues this quarter were the investment in food delivery and the growth of the cloud business: for the former, food delivery losses this quarter might be around 36 billion, at the lower end of the company's previous guidance range; while the cloud business revenue growth exceeded expectations, accelerating to 34.5%, with the profit margin remaining flat year-on-year, stronger than the not-low expectations.

This quarter, Bloomberg's consensus was not updated in time, so its reference value is limited. Below, we look at the expectations of major banks that were updated in a timely manner:

1. CMR maintains 10%, core e-commerce remains stable: The core indicator reflecting traditional e-commerce business, CMR grew by 10.1% year-on-year this quarter, with growth rate remaining stable quarter-on-quarter and completely in line with the updated major bank expectations, relatively stable.

Considering that since September 1 last year, a 0.6% service fee has been charged and site-wide advertising tools have been promoted, the benefit of increased monetization rate should have narrowed this quarter. The stable CMR growth should still be somewhat driven by flash sales.

2. Food delivery losses in line with expectations: The adjusted EBITA of the New China E-commerce Group this quarter was 10.5 billion, a decrease of about 34 billion year-on-year, although it is still relatively better compared to JD.com or Meituan, where the overall group profit was completely swallowed.

As for the actual loss amount caused by instant retail, excluding Taobao flash sales, the profit growth of the China e-commerce segment is expected to be in the single digits, estimating that the net loss caused by flash sales is around 36 billion.

Fortunately, the company had already communicated the new guidance with the market before the earnings release, the actual loss fell within the company's guidance range of 35-40 billion, and it has been fully anticipated and digested. According to the conference call, the UE loss of Taobao flash sales in November was halved compared to July and August, the unit price per order increased by more than double digits month-on-month, and the core strategic position of flash sales has not changed.

3. Alibaba Cloud accelerates again, still impressive: On another main line—AI, Alibaba's performance this quarter was still impressive. This quarter, Alibaba Cloud's revenue grew by 34.5%, stronger than the major bank expectations that had been raised to over 30%. Moreover, the trend shows that the growth rate increased by nearly 9 percentage points compared to the previous quarter, and the second derivative acceleration is also rising.

After excluding internal group demand, Alibaba Cloud's growth rate only increased by 3 percentage points quarter-on-quarter, not as strong. However, referring to leading companies at home and abroad, they basically prioritize supplying computing power to internal business development needs, Alibaba should be the same, but it is not a big issue.

Meanwhile, Alibaba Cloud's profit margin this quarter reached 9%, flat year-on-year and rising quarter-on-quarter, without the situation of AI business proportion dragging down the profit margin (from international experience, AI business profit margins are generally lower than traditional businesses). The performance of both revenue and profit is quite good.

In this quarter's cash flow statement, Capex expenditure reached 31.4 billion, down from the previous quarter, possibly affected by the ban on Nvidia chips. In the first half of fiscal year 26, about 70 billion has been spent, compared to Tencent, Alibaba is still more aggressive in Capex.

At this pace, the previous total expenditure guidance of 380 billion is likely to be raised, which was also confirmed in its conference call.

4. International e-commerce slows down, reduces losses: Partly due to the deterioration of the overseas policy environment, partly due to the need for more resources for domestic business and Alibaba Cloud, Alibaba's international e-commerce business continued the trend of prioritizing profit over scale this quarter, shifting to refined operations. This quarter, revenue growth slowed to about 10% year-on-year, while adj. EBITA officially turned positive to 160 million. The significant slowdown in growth vs. faster-than-expected progress in turning losses into profits offset each other, which can be considered a neutral performance.

5. Other small segments also start investing: Including all other businesses outside the three major segments mentioned above, this quarter's revenue was about 63 billion, a significant year-on-year decrease of 25%, mainly due to the impact of divesting Intime and Sun Art Retail, as well as the impact of some logistics functions being taken over by the corresponding self-operated retail and international e-commerce at the front end.

Meanwhile, this quarter's other business losses expanded significantly from over 1 billion in the same period last year and the previous quarter to nearly 3.4 billion. This reflects the increased investment in Gaode's street sweeping list, and AI 2C directions such as Quark and Qianwen.

6. Overall performance, Alibaba's total revenue this quarter was about 247.8 billion, a year-on-year increase of 5%, excluding the impact of divesting Intime and Sun Art, the year-on-year growth rate was 15%. Slightly accelerated compared to the previous quarter and slightly better than Bloomberg's consensus expectations. Mainly due to stronger-than-expected cloud business growth and revenue contribution from Taobao flash sales.

Adding back stock-based compensation expenses, gross profit increased by 5% year-on-year this quarter, basically consistent with the revenue growth rate. In the previous few quarters, the trend of gross margin improvement reversed, with a slight year-on-year decline of 0.1 percentage points, which should be dragged down by the surge in instant retail business volume, resulting in delivery costs.

7. Significant decline in profit, but within expectations: In terms of expenses (adding back stock-based compensation expenses), the most noteworthy is that marketing expenses further increased to 66 billion this quarter, a significant increase of 34 billion compared to the previous year. This is slightly lower than the previously estimated loss of the food delivery business, which should include not only subsidies accounted for in sales expenses but also delivery cost reductions reflected in costs (gross margin indeed declined).

As for R&D expenses, they increased by 26% year-on-year, accelerating from the previous quarter's 17%, reflecting the growth of various R&D investments under the AI wave. Management expenses, however, still decreased by 25% year-on-year. In the context of rapid growth in the other two expenses, Alibaba still tried to save some funds from internal management expenses.

Overall, the group's adjusted EBITA was 9.4 billion, a year-on-year decrease of about 77%, although it is undoubtedly not a good performance, it is still better than the lowered sell-side expectations under guidance.

8. Decline in shareholder returns: Alibaba repurchased approximately $250 million worth of shares this quarter, significantly reduced from over $800 million in the previous quarter. As the company has started issuing bonds for flash sales and AI investments, and the stock price is not at a low level, the reduction in repurchase amount is reasonable from the perspective of necessity or the company's spare funds.

Of course, whether to repurchase or invest essentially depends on whether the investment yields returns. If investing in AI and large consumption can have a turnaround effect, the reduction in repurchase itself is not something that needs to be particularly criticized.

Dolphin Research's View:

Based on the above analysis, regarding the most concerning issues for the market about Alibaba, the signals conveyed by Alibaba's performance this time are:

1) The core CMR of Taotian still maintains a strong growth of over 10%, although there is no further acceleration compared to the previous quarter, considering that it has entered the base period of the benefit of increased monetization rate since last September, it is still a stable performance.

In horizontal comparison, due to the decline of state subsidies and the significant slowdown in growth of JD.com, and the significant slowdown in advertising revenue of Pinduoduo, Alibaba, which maintains stable CMR growth (and for the first time in history higher than Pinduoduo) can be said to be the best-performing company in the e-commerce industry at the current node to some extent.

And the relatively stable core business continues to provide Alibaba with the confidence and resources to invest in the development of various other businesses.

2) Since the September quarter was the peak of the Taobao flash sales and Meituan food delivery war, this quarter Alibaba's 3Q food delivery losses ultimately ate up nearly 80% of the profits of the China e-commerce segment, and importantly, the company has expressed in the conference call that if the opponent does not provoke a war, Taobao flash sales will stabilize its market share while steadily improving the unit economic guidance.

However, fortunately, the company had fully communicated this before the earnings release, the market has fully digested the hedging, and it is not an unexpected bad news. More importantly, it is about the progress of loss reduction and market share guidance for the food delivery business in 4Q and beyond.

3) On another main line—AI and cloud business, as the absolute leader in the domestic (at least in the 2B field), the market generally holds an optimistic attitude towards Alibaba Cloud. Whether from the perspective of expectation difference or marginal acceleration trend, Alibaba Cloud's revenue growth performance is quite strong.

Meanwhile, the profit margin did not decline as worried due to the drag of AI business. It continues to verify the expectations of investors who are bullish on Alibaba due to the development prospects of domestic AI business.

Overall, the issue of significantly expanded food delivery losses is within expectations, and perhaps more attention is paid to the stronger-than-expected performance of AI and cloud business, Alibaba's overall performance this quarter is still biased towards good. As for the outlook for subsequent business:

1) E-commerce + instant retail business: First of all, the market focus on the instant retail war, although this quarter's instant retail business's erosion of the entire domestic e-commerce segment's profit is far more serious than the "overly optimistic" guidance after the 2Q performance.

But it can be said that many investors, including Dolphin Research, believe that the peak of subsidies and losses in 3Q is a thing of the past, more importantly, whether Alibaba flash sales can still hold onto Meituan's volume and market share while reducing losses in 4Q and beyond.

According to recent market research, within 4Q, Alibaba flash sales is generally keeping up with Meituan's order volume, while UE losses are gradually improving (compared to the high point of single-unit losses in 3Q, there is an improvement close to halving) , and the UE gap with Meituan is also narrowing. The financial report conference call also announced relevant data, mentioning that UE optimization is in line with expectations, and user retention and frequency are better than expected, so for Alibaba, it is obviously a very good trend (the opposite for Meituan) .

Although different research data varies, the general trend is clear that both sides have somewhat reduced the intensity of subsidies, and the order structure has shifted more from beverages to main meals.

On the one hand, Meituan's market share has marginally rebounded (generally from just over 40% to nearly 50%), corresponding to Taobao flash sales volume also falling from being almost equal to Meituan to about 80%~85% of Meituan. On the other hand, for the same reason, Taobao flash sales' single-unit loss and Meituan's gap may have narrowed from over 2 yuan to more than 1 yuan.

According to Dolphin Research's communication with the company, in the future competition in instant retail, Alibaba will ensure that the market share can closely follow Meituan, and will not excessively pursue rapid loss reduction, leading to the order volume being surpassed by Meituan too much.

Therefore, in the long run, Dolphin Research believes that as both sides gradually reduce the intensity of subsidies, an ideal and possible endgame is that in the instant retail market, with a share of about 5:4:1 (Meituan: Alibaba: JD.com), Taobao flash sales can achieve a slight loss (such as 20-30 billion or less per year).

As for the ability of instant retail to divert traffic and create cross-sales for traditional e-commerce and its domestic business (reflected in the acceleration of revenue growth in Taotian's original business). From this quarter's financial report, there should be some limited contribution, but it is undoubtedly not very significant, unless officially disclosed by the company, it is also difficult to quantitatively judge.

However, a currently basically clear trend is that flash sales have indeed brought a significant upward trend in the daily active proportion of the Taobao App and the opening frequency of single users. According to QM statistics, the monthly active users of Taobao in October increased by 9% year-on-year (Pinduoduo increased by about 3%). In March this year, the daily active users of Taobao and Pinduoduo Apps were still roughly the same, but now Taobao has surpassed by more than 66 million people.

As mentioned in Dolphin Research's previous comments on PDD, since the effect of flash sales in attracting users, increasing user retention, opening frequency, and usage time has been verified. Then it can be said that from the perspective of attracting traffic and acquiring customers, food delivery has indeed played a good role.

And Dolphin Research's consistent view is that e-commerce companies doing food delivery do not necessarily need to create much incremental revenue or profit from it. For Alibaba, whose total marketing expenditure in fiscal year 25 reached 144 billion, as long as the subsequent food delivery losses can be controlled within a reasonable range, it can simply exist as a customer acquisition entry-type business for the Taotian Group as a whole.

And combined with the previous performance of Pinduoduo, Dolphin Research believes that after trying to build a general consumption platform of e-commerce + instant retail + in-store + travel, at least in the distribution of traffic within the general e-commerce industry, a new pattern is expected to be created.

2) Alibaba Cloud: As for Alibaba's cloud and AI business, Dolphin Research has always held the view that the domestic AI story is in its infancy, and the subsequent growth space is undoubtedly not yet fully released. And Alibaba Cloud is a company that is in an absolutely leading position in both technical capabilities and business scale in China, making it one of the top choices for investors who are bullish on AI in China.

Therefore, as long as there is no overall AI being falsified, Dolphin Research is optimistic about the trend of Alibaba Cloud in the long term. And the actual performance of Alibaba Cloud this quarter also verified this expectation.

In addition to the previous focus on 2B business, Alibaba recently launched an independent Qianwen App for the C-end and announced that the first week's downloads exceeded 10 million (exceeding the current mainstream AI App downloads in the picture below).

In this regard, we believe that although in C-end applications, it is not "technology wins," whether there are matching usage scenarios and excellent user UI/function design, etc., are quite important factors. This can be seen from the absolute leading position of Douyin's Doubao.

Therefore, it is temporarily impossible to assert whether Alibaba can also eventually occupy an absolutely leading position in the AI 2C business. It is necessary to pay attention to the company's specific investment and development direction in this direction. But in any case, this strengthens Alibaba's previously relatively lacking issue in the 2C end, which may bring additional surprises.

Therefore, overall, Dolphin Research's view on Alibaba Cloud is to regard it as a long-term opportunity, with the market size of the domestic AI industry and the continuous growth of Alibaba Cloud's "S" (i.e., revenue), gradually releasing valuation.

3) Valuation: Dolphin uses the SOTP valuation method, conservatively assuming a pre-tax loss of about 95 billion due to instant retail investment, with a total post-tax profit of about 100 billion for the new China E-commerce Group based on the original Taotian Group's fiscal year 26 profit. Considering that Taotian is currently the most resilient company in the e-commerce industry, and instant retail has considerable loss reduction space, which is also expected to drive the overall growth of the China e-commerce segment, giving a relatively high 12x PE in the industry, corresponding to about $75 per share. If based on the profit of the Taotian Group excluding food delivery losses, it corresponds to about 7x PE.

As for the Alibaba Cloud segment, considering its absolutely leading position in China and the continuous upward adjustment of revenue growth, based on about 156 billion revenue in fiscal year 26, the valuation multiple is raised to 6x PS, corresponding to about $58 per share.

The international e-commerce segment has not changed much, based on about 150 billion revenue, considering that the progress of loss reduction is better than expected, the valuation is slightly increased to 2x PS (lower than the market's generally given multiple), corresponding to about $19 per share.

The total stock price corresponding to the above three core businesses is about $152, which can generally support the current price (slightly lower), and can be regarded as a neutral and conservative valuation. If the equity value and net cash of Ant and Alibaba Health are added (this part is given a 30% holding discount), the total valuation is about $190, which has nearly 19% space compared to the pre-performance price.

In the short to medium term, Alibaba's stock price has indeed reflected a considerable part of our previous optimistic logic, but if there is further good news in maintaining volume and reducing losses in food delivery or AI business, then there will still be long-term space.

Below is a detailed analysis of the performance:

I. New Alibaba Financial Report Caliber

In the new fiscal year 2026, with the integration of Ele.me's instant retail business and Fliggy's travel business into the original Taotian Group, forming the new China E-commerce Group, Alibaba's organizational structure and financial report caliber have been updated once again. As shown in the figure below, Alibaba Group's new organizational structure is divided into four major segments:

1) China E-commerce Group: including the original Taotian Group + Fliggy + Taotian Flash Sales/Ele.me business;

2) The original international e-commerce group remains unchanged;

3) Alibaba Cloud Group also remains unchanged;

4) All other businesses, including the previously independently disclosed Cainiao, China Local Services, Alibaba Entertainment Group, etc., are all included in other business segments.

II. Core E-commerce Growth Remains Stable

1. In the new China E-commerce Group, which includes Ele.me's instant retail business and Fliggy's travel business, the core indicator reflecting the far-field e-commerce business, CMR grew by 10.1% year-on-year to 78.9 billion this quarter, with growth rate remaining stable quarter-on-quarter and completely in line with the updated major bank expectations.

Since September 1 last year, a 0.6% service fee has been charged and site-wide advertising tools have been promoted, the benefit of increased monetization rate should have narrowed. Considering this impact, the stable growth of CMR this quarter is still acceptable.

2. After incorporating Taobao Flash Sales/Ele.me, instant retail revenue this quarter was nearly 14.9 billion, up about 55% quarter-on-quarter. According to research, Alibaba's instant retail daily order volume in 3Q increased by about 120% quarter-on-quarter compared to 2Q, but the revenue growth was significantly lower, reflecting that subsidies basically offset most of the new revenue.

3. Two businesses with little change in caliber after the organizational adjustment, self-operated retail (including related fulfillment) business, revenue grew by 5% year-on-year this quarter, continuing to slow down compared to the previous quarter.

The veteran 1688.com wholesale business, as one of the current main footholds of the "cost-effective" strategy, revenue grew by 12.6% year-on-year this quarter, with growth rate remaining stable, still performing well. According to the company, it is mainly driven by additional service revenue provided to 1688 members.

Overall, due to the basically stable growth of CMR and other business lines this quarter, and the year-on-year high growth of food delivery revenue by nearly 60%, the overall revenue growth rate of the domestic e-commerce group this quarter also increased to 15.5%.

III. Food Delivery Losses Rise, Remaining to See Efficiency Improvement Slope

One of the most concerning issues in the market, how much loss did Taobao Flash Sales cause this quarter? According to the company's disclosure, the adjusted EBITA of the new China E-commerce Group this quarter was 10.5 billion, a decrease of about 34 billion year-on-year, a significant decline compared to the previous quarter, although it still did not completely swallow the overall group profit like JD.com or Meituan, it also led to a nearly 77% year-on-year decline in the profit of the China e-commerce segment.

Fortunately, the company had readjusted its guidance to the market before the earnings release, and the major banks' profit expectations for the China e-commerce segment this quarter were around 7.5 billion to 10 billion, with actual performance falling at the upper end of the range.

As for the actual loss amount caused by instant retail, excluding Taobao Flash Sales, the profit of the China e-commerce segment grew slightly higher than revenue, calculating that the net loss caused by flash sales is about 39 billion (under the adjusted EBITA caliber), although at the upper limit, it is still within the company's guidance range of 35-40 billion.

Meanwhile, attention should be continuously paid to the improvement of Taobao Flash Sales' own operational efficiency and its driving effect on e-commerce. According to the financial report conference call, the order structure of Taobao Flash Sales has been optimized, and the scale effect has also brought a significant reduction in logistics costs, since November, the UE loss of flash sales has been halved compared to July and August, and the unit price per order has increased by more than double digits month-on-month.

IV. Biggest Highlight—Alibaba Cloud Continues to Accelerate Beyond Expectations

On another main line—AI/cloud business, Alibaba's performance this quarter was still impressive. Alibaba Cloud's revenue grew by 34.5%, although the major bank expectations had been raised to over 30%, it was still significantly better than expected. Moreover, the trend shows that the growth rate increased by 9 percentage points compared to the previous quarter, and the second derivative acceleration is also rising.

However, we also noticed that after excluding internal group demand, Alibaba Cloud's quarter-on-quarter increase fell back to 3 percentage points. However, leading companies at home and abroad basically prioritize supplying computing power to internal business development needs, and Alibaba's situation should be the same.

In addition to the acceleration of growth, Alibaba Cloud's profit margin this quarter reached 9%, flat year-on-year and rising quarter-on-quarter. There was no situation of AI business proportion dragging down the profit margin, (from international experience, AI business profit margins are generally lower than traditional businesses). Behind this should be the improvement of scale effect and the benefit of clearing low-quality businesses offsetting other adverse effects.

In addition, this quarter's cash flow statement shows that Capex expenditure reached 31.4 billion, down from the previous quarter, but still at a high level, possibly affected by the ban on Nvidia chips. In the first half of fiscal year 26, about 70 billion has been spent, with the investment pace higher than the previous guidance of a 3-year 380 billion plan.

V. International E-commerce Achieves Profitability

Partly due to the deterioration of the overseas policy environment, partly due to the need to allocate more resources to domestic business and Alibaba Cloud, Alibaba's international e-commerce business continued the trend of prioritizing profit over scale this quarter, shifting to refined operations. This quarter, revenue growth slowed to about 10% year-on-year. Correspondingly, this quarter officially turned profitable, achieving a positive 1.6 billion adj. EBITA. The significant slowdown in growth vs. faster-than-expected progress in turning losses into profits offset each other, which can be considered a neutral performance.

VI. Gaode Street Sweeping & Qianwen Quark, Other Small Segments Also in Investment Period

In addition to the three major segments mentioned above, including the newly added Cainiao, Alibaba Entertainment, Gaode, and businesses that were originally in other categories, this quarter's revenue was about 63 billion, a significant year-on-year decrease of 25%, mainly due to the impact of divesting Intime and Sun Art Retail, as well as the impact of some logistics functions being taken over by the corresponding self-operated retail and international e-commerce at the front end. Meanwhile, this quarter's other business losses expanded significantly from over 1 billion in the same period last year and the previous quarter to nearly 3.4 billion. However, the major banks' expected losses have generally been raised to 5 billion, which is actually slightly less. This mainly reflects the increased investment in Gaode's street sweeping list, and AI 2C directions such as Quark and Qianwen.

VII. Overall Performance Generally Meets Expectations, Relatively Stable

Overall, Alibaba's total revenue this quarter was about 247.8 billion, a year-on-year increase of 5%, excluding the impact of divesting Intime and Sun Art, the year-on-year growth rate was 15%. Slightly accelerated compared to the previous quarter and slightly better than Bloomberg's consensus expectations. Mainly due to stronger-than-expected cloud business growth and revenue contribution from Taobao flash sales.

This quarter, adding back stock-based compensation expenses, gross profit increased by 5% year-on-year, basically consistent with the revenue growth rate. In the previous few quarters, the trend of gross margin improvement reversed, with a slight year-on-year decline of 0.1 percentage points, which should be dragged down by the surge in instant retail business volume, resulting in delivery costs.

In terms of expenses (all below are not considering stock-based compensation expenses), the most noteworthy is that marketing expenses further increased to 66 billion this quarter, a significant increase of 34 billion compared to the previous year. This is slightly lower than the previously estimated loss of the food delivery business, which should include not only subsidies accounted for in sales expenses but also delivery cost reductions reflected in costs (gross margin indeed declined).

As for other expenses, R&D expenses increased by 26% year-on-year, accelerating from the previous quarter's 17%, reflecting the growth of various R&D investments under the AI wave. Management expenses, however, still decreased by 25% year-on-year. In the context of rapid growth in the other two expenses, Alibaba still tried to save some funds from internal management expenses.