Forget the food delivery war — Alibaba makes clear the real play in China is AI

Alibaba, the tech giant known for its robust presence in China, is steering its strategy away from the fiercely competitive food delivery market and placing a significant emphasis on artificial intelligence (AI). In its latest earnings report, the company revealed a modest 2% increase in overall revenue, amounting to 247.65 billion Chinese yuan (approximately $34.6 billion) for the quarter ending June 30. This figure fell short of analysts' expectations, which anticipated revenues of 252.92 billion yuan. Despite a 3% decline in operating profit to 35 billion yuan, investors responded positively to the report. On Friday, shares of Alibaba in New York surged by 12.9% to close at $135, while its Hong Kong-listed shares saw an impressive rise of up to 18% the following Monday. This surge was largely driven by a significant increase in revenue from AI-related products, alongside a remarkable 26% year-over-year growth in Alibaba Cloud, which generated 33.4 billion yuan, surpassing analyst projections of an 18% increase. Alibaba Group's CEO, Eddie Wu, highlighted the company's commitment to AI during the earnings call, stating, "Our investments in AI have begun to yield tangible results." He emphasized the clear potential for AI to become a substantial growth engine for Alibaba. Analysts echoed this sentiment, noting that the cloud division is experiencing accelerating growth fueled by rising AI adoption and enhanced modeling capabilities. While the cloud sector is thriving, Alibaba's e-commerce division, which includes both traditional e-commerce and food delivery services, reported a 10% revenue increase to 140 billion yuan. However, earnings before interest, taxes, and amortization saw a steep decline of 21% from the previous year, largely due to substantial subsidies in the food delivery and instant shopping segments. Alibaba has been investing heavily in its quick commerce initiative to compete against leaders like Meituan and newcomers such as JD.com. Jiang Fan, Alibaba's e-commerce chief, acknowledged the heavy spending but expressed confidence that losses would diminish as customer loyalty improves efficiency. Analysts from Nomura indicated that the quick commerce sector has reached a scale where the focus can shift from aggressive acquisition to optimizing operations. Morningstar's senior equity analyst, Chelsey Tam, noted that Alibaba's strategic use of its ecosystem resources gives it a competitive edge in the ongoing delivery battle. She argued that this could significantly enhance Alibaba's prospects for market share and profitability in the medium term. Overall, Alibaba's stock has seen remarkable growth, with a 59% increase in New York and a 65% rise in Hong Kong this year.