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

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March 20 News: Alibaba’s stock price dropped over 6 intraday, hitting a low of HKD 123.5, the lowest since August last year; Alibaba’s U.S. stocks closed down over 7% overnight, at $124.9.

On the news front, 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 decreased 67% year-over-year to RMB 16.322 billion, and adjusted net profit also fell 67% to RMB 16.71 billion, well below the market forecast of RMB 29.579 billion. The overall decline in profitability 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% year-over-year.

How to view Alibaba’s “revenue growth but profit decline”? After the earnings release, China International Capital Corporation (CICC) lowered Alibaba’s target prices for Hong Kong and U.S. stocks by 13% to HKD 172 and USD 178, respectively, while maintaining a “beat the industry” rating. The firm indicated that in the medium to long term, widespread application of Agent, AI model iteration, and AI commercialization exploration are expected to support revenue growth, but the company’s guidance of $100 billion in external cloud and AI revenue over five years still needs to be validated quarter by quarter; domestic consumption showed some improvement in Q1 2026, which may boost customer management revenue growth, but pressures remain on domestic and international e-commerce businesses due to uncertainties in consumption and regulation, as well as government subsidies tapering and competitive pressures.

Wall Street investment banks characterize this as a “key profit reset,” noting it is an inevitable result of investments in AI and instant retail strategies. The biggest highlight in the earnings report is the explosion of 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% used externally. Goldman Sachs expects Alibaba Cloud’s quarterly growth in March to reach 40%.