Alibaba Q2 FY2026 earnings: revenue beats estimates despite 71% profit decline

Key financial metrics

Alibaba reported RMB247.8 billion in revenue (versus consensus estimate of RMB242.7 billion) for the second quarter of fiscal year 2026, representing a 5% year-on-year (YoY) increase whilst remaining flat quarter-on-quarter. However, non-GAAP diluted earnings declined 71% year-on-year to RMB4.36 per American Depositary Share (ADS), approximately 20% below analyst expectations. This substantial contraction in profitability reflects the company's aggressive capital allocation towards strategic growth initiatives.

Cloud business exceeds expectation

The Cloud Intelligence Group sustained its position as the primary revenue growth driver, advancing 34% YoY to RMB39.8 billion during the quarter. AI-related products demonstrated triple-digit growth for the ninth consecutive quarter, underscoring sustained momentum in this critical segment.

Chief Executive Officer Eddie Wu addressed market concerns regarding an AI bubble during yesterday's earnings call, indicating the company maintains confidence in the sector’s prospects in the next three years. He articulated Alibaba's strategic commitment to expanding AI infrastructure capabilities to accommodate surging market demand and navigate intensifying competitive pressures within the rapidly evolving technology landscape.

The company is positioning itself to establish leadership within China's consumer AI applications sector, particularly given the absence of Google's Gemini and OpenAI's ChatGPT in the domestic market. Alibaba's proprietary AI application Qwen achieved over 10 million downloads within four days of launch this month, surpassing the initial adoption trajectory of DeepSeek upon its market entry.

Core retail business demonstrates resilience

Supported by government consumption stimulus measures and enhanced marketing expenditure, Alibaba's local e-commerce segment recorded 16% revenue growth – the fastest expansion rate since 2021. The company prioritised operational efficiency improvements within its quick commerce operations, yielding enhanced customer retention metrics and elevated average order values.

The Singles' Day Shopping Festival successfully generated double-digit consumer growth YoY on the Taobao platform, substantially supported through promotional discounts underwritten by the retailer. These outcomes will be reflected in third quarter financial results.

Marketing spend and AI investment constrain profitability

However, the robust revenue growth trajectory came at considerable cost. Sales and marketing expenses more than doubled to RMB66 billion as the company competes for market share against rival quick commerce platforms including JD.com and Meituan. Adjusted EBITDA for the China E-commerce Group contracted 76% YoY. We anticipate marketing expenses will remain elevated in the near term.

Alibaba's balance sheet position has deteriorated, reflecting a net cash flow outflow of RMB21.8 billion last quarter. An 80% YoY increase in capital expenditure served as the primary driver, as the company pursues aggressive investment in AI infrastructure development.

Share price analysis

Alibaba's ADR initially advanced approximately 3% during US pre-market trading following the results, though this optimism swiftly reversed as investor concerns regarding AI expenditure and margin compression intensified. Hong Kong-listed shares also opened lower today. Despite closing 2.3% lower in US markets yesterday, the security has delivered 86% year-to-date gains, significantly outperforming the MSCI China Index.

From a fundamental analysis perspective, the stock's 12-month forward price-to-earnings ratio has expanded considerably from 12 times to 18 times over the past six months. As market participants increasingly focus on profit-taking ahead of year-end, a retracement following the sustained rally since April appears unsurprising.

From a technical analysis standpoint, the share price has rebounded from $148.6, approximately a 50% Fibonacci retracement level from the recent upward wave. The recovery trajectory will encounter resistance around $182.5. Maintaining support above the 200-day moving average at $135.1 remains critical for sustaining the ascending medium-term trend. Failure to hold this level may trigger further downside towards the $115–$120 range.

Figure 1: Alibaba daily price chart