BABA Stock: Qwen app's real impact on valuation

Alibaba's AI Bet: Is This More Than Just Hype?

Alibaba's stock (BABA) has enjoyed a substantial recovery, with an 82% increase over the past year and an 89% jump year-to-date. Bank of America analyst Joyce Ju maintains a "Buy" rating, albeit with a reduced price target of $188 (down from $200), citing near-term e-commerce growth softness. The question is: is this resurgence justified, or is it built on sand?

The company's Q2 FY26 earnings revealed revenue of 247.8 billion yuan (about $34.8 billion), a 5% year-over-year increase, exceeding expectations. However, adjusted diluted EPS was 4.36 yuan, missing the consensus of 6.34 yuan. A discrepancy immediately presents itself: revenue beat expectations, but earnings lagged. Why? The answer, as always, lies in the spending. Alibaba is pouring capital into AI, cloud computing, and quick commerce initiatives.

Cloud Growth: A Silver Lining or a Mirage?

The cloud business is being touted as a major strength. Revenue climbed 34% year-over-year to 39.8 billion yuan ($5.6 billion), surpassing estimates of 38 billion yuan. AI-related revenue is reportedly experiencing triple-digit growth for nine consecutive quarters, now accounting for over 20% of cloud revenue. This sounds impressive, but let's dig deeper. Triple-digit growth from what base? 20% of cloud revenue—but what percentage of overall revenue is that, really? These are the kinds of questions that seem to go unasked.

Furthermore, the claim that AI demand is growing fast needs careful examination. Is this organic demand, or is it fueled by internal consumption—Alibaba using its own AI tools? The distinction matters. One signals genuine market traction, the other, well, doesn't. And this is the part of the report that I find genuinely puzzling. The analyst expects cloud revenue to remain on a "fast growth track" because of continued investment. But isn't that just saying, "we'll keep spending money, so revenue should go up"? That's not exactly a groundbreaking insight.

Quick Commerce: Burning Cash, but Less Quickly?

Alibaba's quick commerce division (fast grocery and delivery) reported a 36–37 billion yuan loss. However, the loss per order has narrowed to about 5 yuan. Management projects losses will drop by at least half, with improvements already apparent in October. Ju anticipates losses dropping to about 20 billion yuan next quarter.

On the surface, this looks like progress. But let's consider the sheer scale of these losses. Even if losses are halved, 20 billion yuan is still a massive bleed. Is this sustainable? Are they simply subsidizing deliveries to gain market share, or is there a path to genuine profitability here? What is the projected timeline to profitability, and what assumptions are baked into that projection? I've looked at hundreds of these filings, and this particular omission is glaring.

E-commerce: The Core Weakening?

The analyst does flag softer expectations for Alibaba's e-commerce business in the December quarter. Customer management revenue (CMR), including merchant ads and fees, is expected to slow as earlier pricing benefits fade. Earnings forecasts have been reduced by 7% to 20% through FY28 as a result.

This is perhaps the most concerning point. E-commerce is still the core of Alibaba's business. If the core is weakening, can the cloud and quick commerce divisions truly compensate, especially given the capital they require? User traffic and engagement are improving, according to the report, but that doesn't necessarily translate to increased revenue. Are users engaging with higher-margin products, or are they simply browsing?

Adding another layer to the narrative, Alibaba's revamped Qwen app hit 10 million downloads in its first week. This is undoubtedly a positive sign. The company's Hong Kong-listed shares even climbed more than 5% after the announcement. Analysts are suggesting Qwen could become China's "WeChat for the AI era." But let's not get ahead of ourselves. Downloads don't equal active users, and active users don't equal revenue. WeChat's dominance wasn't built in a week. Alibaba's New Qwen App Smashes 10 Million Downloads In A Week — And Sends Its Stock Soaring: Analysts See Clear Path To China's Next AI-Era WeChat - Alibaba Gr Hldgs (NYSE:BABA), Apple (NASDAQ:AAPL)

And let's not forget the competition. The AI space in China is fiercely competitive, with low-cost challengers like DeepSeek driving down prices. This is great for consumers, but it puts pressure on Alibaba's margins.

Is Alibaba's AI Narrative Overblown?

The market seems to be buying into the AI narrative, driving up Alibaba's stock price. But a closer look at the numbers suggests that the story is more complex. While the cloud business shows promise, it's still unclear whether it can offset the weakness in e-commerce and the substantial losses in quick commerce. The Qwen app's initial success is encouraging, but it's far too early to declare victory.

A Reality Check

Alibaba is making bold bets on AI. Whether those bets will pay off, or simply bleed the company dry, remains to be seen. The market may be pricing in future potential, but the present reality is far less certain.