Alibaba’s net profit fell 75% in the June quarter, to $1.54bn. The cause was not a weak business. It was the bill for building one. Capital spending reached $9.98bn in three months, up 75% on the same quarter last year, according to the results announcement. In the same accounts, the cloud unit that spending pays for turned a segment profit up 133%.

Revenue rose 9% to $39.64bn, slightly ahead of the LSEG consensus of RMB268.88bn, CNBC reported. Free cash flow went the other way. The company recorded an outflow of $6.58bn, against an outflow of $2.77bn a year earlier. Alibaba’s US shares fell around 5% after the market opened.

The cloud half is working

AI Cloud and Compute Services brought in $7.14bn, up 45% year on year. That is the division’s fastest growth in 22 quarters, the South China Morning Post calculated. AI-related product revenue inside it hit $1.82bn and grew in triple digits for the twelfth consecutive quarter.

The unit also made money. Its adjusted EBITA reached $830m, a rise of 133%. Chief financial officer Toby Xu put the cloud segment’s EBITA margin at 12%. Alibaba Cloud held the largest share of China’s AI cloud market at 38.1%, the company said, citing research firm Omdia.

One caution on the comparisons. Alibaba rebuilt its reporting segments this quarter, folding chip arm T-Head into the cloud business and pulling its model labs and consumer AI apps into a new unit. Year-on-year figures have been recast to match, so they are consistent, but the segments are not the ones analysts modelled a quarter ago.

Where the money went

The company gave three reasons for the capex jump. Procurement cycles fluctuated. It added CPU-compute capacity in anticipation of customers adopting AI agents. And the price of a broad range of chip components rose, the same squeeze that hit the memory crunch victims across Chinese hardware this quarter.

That spending is what turned the cash flow negative. Purchases of property and equipment came to $9.97bn against operating cash flow of $3.38bn. The pattern will look familiar to anyone who read Meta’s last quarter, where AI capex opened a cash-flow hole while Microsoft turned the same spending into cloud revenue. Alibaba is doing both at once.

The half that loses money

The new AI Labs and Applications segment holds the model labs, the Qwen consumer app and the QwenWork agent. It made $492m in revenue, up 16%. It lost $2.04bn at the adjusted EBITA line, against a loss of $475m a year earlier. The company attributed that to AI investment and to the cost of running inference for the Qwen app.

Alibaba is not alone in the discomfort.

Tencent more than doubled its own AI spending last week, and unsettled investors doing it. Analysts noticed here too. Citigroup wrote that rising capex and negative free cash flow “could raise concerns around capital needs and investment returns”. Bloomberg Intelligence went further.

AI will “continue to depress, not enhance, returns” at China’s leading AI companies, analysts Robert Lea and Jasmine Lyu wrote, and Alibaba’s AI business will generate cash losses for the next three years on their estimate.

What the company says

Chief executive Eddie Wu argued the opposite case on the analyst call. “Our AI business’s capacity to self-fund and sustain itself is strengthening, giving us greater confidence to keep investing,” he said. AI has become the company’s most certain growth engine, he added.

He put numbers behind it. Annualised revenue from AI products should approach $10bn this quarter, up from about $7.3bn in April to June, Bloomberg reported. Executives said the group should recoup its overall AI investment inside the three-year window it set in early 2025, when it pledged more than RMB380bn.

The headline 75% also flatters the argument against the company. Non-GAAP net income, which strips out share-based pay, investment swings and impairments, fell 38% to $3.05bn. Adjusted EBITA of $4.03bn came in ahead of expectations. Nikkei read the quarter as missing estimates. The South China Morning Post read it as beating them. Both were describing different lines of the same accounts.

The €550m sitting in the accounts

One number in the release went unmentioned in the day’s coverage. General and administrative expenses jumped to 4.7% of revenue from 3.0%. The reason, the company states plainly, is a provision for the European Commission’s Digital Services Act fine of €550m.

That is the penalty Brussels handed AliExpress in July, when it fined the marketplace €550m in its largest DSA action to date. It has now landed in the group accounts. A separate goodwill impairment of $657m, booked against businesses in the All Others segment, took another bite.

The model, and the shrinking half

Alibaba opened the weights of Qwen3.8-Max in August, releasing 2.4 trillion parameters. It is the first time the company has done that for its largest model class, and it comes while Qwen sits as the most downloaded open model family. Giving away the weights is a distribution strategy, not a revenue one.

Meanwhile the business that funds all of it is shrinking. China e-commerce revenue fell 8% to $16.35bn, with customer management revenue down 7%. Quick commerce grew 45%. The company has been selling assets to pay for the pivot, including the games arm it sold for $1.5bn this month.

The target is to quintuple cloud and AI revenue to $100bn within five years. This quarter bought about a tenth of that, and cost a quarter of the group’s profit to do it.

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