Alibaba Group Holding Limited (NYSE:BABA) reported its fiscal second-quarter 2026 results on Nov. 25, delivering mixed signals that suggest investors approach Alibaba stock with caution. While revenue rose modestly, key profitability metrics fell sharply, highlighting risks in the company’s near-term outlook.
The Chinese e-commerce and cloud computing giant posted revenue of RMB 247.8 billion, a 5% increase year-over-year, beating estimates. However, non-GAAP earnings of just $0.61 per American Depositary Share plunged 71% from the previous year and fell short of Wall Street forecasts. This stark contrast between top-line growth and bottom-line decline signals structural challenges that warrant careful consideration.
Collapsing Profitability Despite Growth
Alibaba’s adjusted EBITDA declined 78% as heavy investments in quick commerce and AI infrastructure weighed on margins. The quick commerce segment generated RMB 29.7 billion in revenues, growing 60% year-over-year, yet it remains a drain on overall profitability. While per-order losses improved by 50% since mid-2025, it wasn’t enough to offset margin pressures across the business.
Operating cash flow also fell dramatically, dropping 68% to RMB 10.1 billion. Free cash flow turned negative with an outflow of RMB 21.8 billion, compared with an inflow of RMB 13.7 billion in the same quarter last year. Elevated capital expenditures of RMB 31.9 billion on AI and cloud initiatives further strained cash generation, underscoring the financial risk associated with aggressive expansion.
Intensifying Competition in Cloud Services
Alibaba’s Cloud Intelligence Group posted revenues of RMB 39.8 billion, up 34%, with AI-related products achieving triple-digit growth for the ninth consecutive quarter. Despite these gains, global competition remains fierce. Amazon (NASDAQ:AMZN) AWS, Microsoft (NASDAQ:MSFT) Azure, and Google (NASDAQ:GOOGL) Cloud collectively hold 62% of the global enterprise cloud market.
AWS leads with 29% market share and strong margins, Microsoft Azure maintains a 20% share supported by enterprise integration, and Google Cloud holds 13%, leveraging advanced AI capabilities. Alibaba faces significant challenges in gaining share, especially as these competitors continue to dominate key segments with superior efficiency, enterprise relationships, and differentiated AI offerings.
Valuation Concerns Amid Margin Compression
Alibaba’s stock has surged 85.9% year-to-date, establishing a valuation that appears stretched given declining profitability. Shares initially rose 3% in pre-market trading after the earnings report but quickly reversed lower, signaling investor skepticism.
The forward 12-month price-to-sales ratio of 2.42 times now exceeds the Zacks Internet-Commerce industry average of 2.13 times. This premium is difficult to justify in light of margin erosion, cash flow deterioration, and intense competition, raising concerns about near-term stock performance.
Analyst Recommendations
Wall Street analysts have taken note of Alibaba’s challenges. BABA currently carries a Zacks Rank #5 (Strong Sell), reflecting caution around shrinking profits, competitive pressures, and valuation risks. Investors may consider selling or avoiding Alibaba shares in the near term, as the company works to stabilize profitability and manage expansion costs.
Bottom Line
Alibaba Group Holding (NYSE:BABA) continues to grow revenue, particularly in cloud and AI segments, but shrinking profitability, negative cash flow, and stiff competition from Amazon, Microsoft, and Google cloud services make the near-term outlook uncertain. Given the stretched valuation, investors should carefully evaluate Alibaba stock outlook before committing capital.
Strategic Considerations for Investors
Investors evaluating Alibaba (NYSE:BABA) should weigh both risks and potential opportunities. While near-term earnings and cash flow pressures are concerning, the company’s long-term investments in AI, cloud computing, and quick commerce could position it for future growth if executed effectively. Strategic partnerships, expansion into underserved international markets, and innovations in digital commerce may provide avenues to improve margins and regain competitive footing.
However, the market remains cautious, and volatility in Chinese regulations, macroeconomic conditions, and global supply chains could exacerbate short-term headwinds. Prudent investors may consider maintaining a diversified portfolio, monitoring quarterly earnings closely, and watching for improvements in operating efficiency before increasing exposure to BABA stock.
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