Stratified with Competitors, Entering the Second Half Internally.

Written by | BlueHole Business Zhao Weiwei

Alibaba's Q2 2026 financial report reveals profit pressures and continued escalation in AI investment.

AI and cloud business remain the primary highlights. Compared to Microsoft Cloud and Amazon Cloud, which achieved revenue growth rates of 43% and 37% respectively, Alibaba Cloud also recorded a 45% revenue increase this quarter, keeping pace with international peers and operating in the same stratosphere as its competitors.

Increased AI investment is the flip side of this growth. With Tencent's latest quarterly capital expenditure reaching RMB 52.784 billion, Alibaba's latest quarterly capital expenditure surged to RMB 67.678 billion, a 75% year-on-year increase, indicating a more aggressive bet than Tencent. Combined, Alibaba and Tencent's single-quarter capital expenditures exceeded RMB 120 billion.

The accelerated capital expenditure signals rising AI demand faced by cloud providers—a race where no one can afford to fall behind.

Over the past year and a half, Microsoft, Google, and Meta's quarterly capital expenditures have soared from $30 billion to $60 billion, becoming a core metric for the sustained AI narrative. AI demand is far from peaking, with significant market expansion potential remaining.

In the grand cycle of AI's accelerated commercialization, Alibaba operates in the same stratosphere as its competitors, while internally, a transformative shift is entering its second half.

A year ago, Alibaba announced a three-year, RMB 380 billion AI investment plan. As of Q2 this year, Wu Yongming revealed during the earnings call that total investment has reached RMB 190 billion, meaning over half of the AI investment plan is complete. The focus now shifts to the more critical second half.

Regarding the ROI cycle for AI capital expenditures, Wu Yongming provided a clear answer during the call: The investment return on AI computing capital expenditures is highly certain, with current overall investments expected to recoup costs within three years. As gross margins for AI-related products continue to rise, the recovery cycle for computing assets is expected to shorten further to around 2.5 years, or even two years.

Funds saved from the food delivery battlefield are flowing even faster into the AI arena—Alibaba's most critical strategic pivot. The food delivery war is over, but the AI investment battle is only halfway done.

ATH Business Group's Performance Remains Unclear

This quarter's financial report introduces a new performance disclosure framework for Alibaba, divided into four segments, but the performance of the newly established ATH (Alibaba Token Hub) business group remains unresolved.

According to Alibaba's latest quarterly financial report, the original Chinese e-commerce, international e-commerce, and other segments, including Hema, have been consolidated into Alibaba's e-commerce segment. The "AI Cloud and Computing Services" segment includes Alibaba Cloud and T-Head chip business, while the "AI Labs and Applications" segment covers AI model R&D, QianWen C-end business division, and QianWen Office business group.

The first-time segmentation of "AI Cloud and Computing Services" and "AI Labs and Applications" provides a clear view of Alibaba's revenue and investment in AI models and applications. "AI Cloud and Computing Services" holds the primary position, with revenue of RMB 48.437 billion and a 45% YoY increase, while "AI Labs and Applications" generated RMB 3.34 billion in revenue, up 16% YoY.

This means Alibaba's AI revenue is still primarily driven by cloud and computing services, with AI application models still in the investment phase, incurring RMB 13.9 billion in losses. Meanwhile, the newly established ATH business group, as the core carrier of AI infrastructure, is beginning to show its performance contributions.

AI cloud business has become one of the most critical drivers of Alibaba Cloud's revenue. During the earnings call, Wu Yongming revealed that Alibaba's AI-related products' annualized revenue (ARR) surpassed RMB 49.5 billion this quarter, accounting for 35% of Alibaba Cloud's external commercial revenue.

This means AI now contributes over one-third of Alibaba Cloud's external revenue, and due to higher gross margins for AI products, it is driving the cloud division's profit margins from break-even toward a healthy 12%. AI is not just a growth story—it has become a core component of the cloud business revenue structure.

A significant contributor is the MaaS (Model as a Service) business.

Last quarter, Alibaba expected MaaS annualized revenue to exceed RMB 10 billion this quarter. By August this year, that figure surpassed RMB 16 billion, significantly exceeding previous targets, while the year-end target of RMB 30 billion remains unchanged.

Another highly anticipated figure comes from T-Head's chip business, which has begun accelerating commercialization, though specific chip revenue was not disclosed in the financial report.

Wu Yongming mentioned that T-Head chips have entered large-scale commercialization, with the previous generation manufacturing and shipping over 500,000 units. Super-node instances based on the latest-generation Zhenwu M890 are now available on Alibaba Cloud and have started sales, with volume ramping up in the second half of the year.

As of early August, Zhenwu chips have served over 650 clients. T-Head has formed a full-stack self-developed chip layout covering GPUs, CPUs, and network chips, with Wu Yongming stating, "We are indeed first in the industry."

Currently, Alibaba's large-scale AI data center delivery cycle has been compressed to 100 days. The speed of chip business and underlying data center construction is Alibaba's greatest confidence in ensuring AI computing ROI within three years.

How Will Expenditures Translate into Profits?

Is demand outpacing investment when it comes to pouring money in without immediate returns?

This is the biggest concern regarding tech giants' escalating AI investments. While Amazon AWS, Google Cloud, and Microsoft Cloud each have distinct advantages, Alibaba Cloud remains in a catch-up position.

In terms of revenue scale, Amazon AWS maintained its top position in the latest quarter with $42.2 billion in revenue. Microsoft Intelligent Cloud followed with $39.3 billion, while Google Cloud remained in the third tier with $24.8 billion, roughly 40% behind the leader in absolute terms.

However, Google leads in growth, with an 82% YoY increase in the latest quarter, far outpacing peers. It is the only top-tier cloud provider achieving near-doubling high-speed growth, driven by AI-customized computing power and TPUs, forming its greatest differentiated capability.

From a profitability perspective, Microsoft Cloud leverages strong synergies between software subscriptions and cloud services, with high-margin AI products like Copilot maintaining elevated profitability. Its 40.6% profit margin is a target pursued by Amazon and Google Cloud.

Temporary pressure on free cash flow has become an industry norm. In terms of capital expenditure, Amazon is the most aggressive, followed by Google, with both experiencing temporary free cash flow pressures. Only Microsoft maintains a slightly lower investment intensity, preserving positive free cash flow and optimal return efficiency.

Every metric change among cloud providers attracts significant external attention and amplification. Google Cloud currently boasts the fastest revenue growth among the top four cloud providers. Google CEO Sundar Pichai defines current investments as the "early stages of a long-term structural shift" and plans to expand third-party cloud computing procurement to fill gaps during the transition period of constrained self-built computing capacity delivery.

Demonstrating that demand exceeds current investments is the primary way cloud providers address skepticism.

The backlog of orders among the top four U.S. cloud service providers exceeds $2.3 trillion, with Google's existing orders surpassing $514 billion, paving the way for Google's performance certainty. The revenue realization cycle of Google's self-developed TPU chip external sales will also become a critical variable for its 2027 performance growth.

The most significant similarity between Google and Alibaba is their full-stack AI closed loop (closed loop). Both have built complete chains from self-developed AI chips, public cloud infrastructure, native large models to proprietary business scenarios. Particularly in business operations, both use cloud infrastructure as their profit foundation, with large models and AI applications shouldering high investments, while self-developed chips simultaneously undertake cost reduction and commercialization tasks. They continue to ramp up capital expenditures while relying on order backlogs to address capital market concerns about ROI.

Regarding the ROI cycle for AI capital expenditures, Wu Yongming provided a clear answer: The investment return on AI computing capital expenditures is highly certain, with current overall investments expected to recoup costs within three years. As gross margins for AI-related products continue to rise, the recovery cycle for computing assets is expected to shorten further to around 2.5 years, or even two years.

To maintain a leading position in the next-generation AI competition, cloud providers are willing to sacrifice short-term free cash flow to build long-term infrastructure barriers.

The Shift from Food Delivery Wars to AI

The food delivery battle has given way to the AI race, marking the end of the era where instant retail subsidies drove scale. This is the clear message from Alibaba's financial report.

Looking back at the past few quarters, instant retail subsidies from Taobao Quick Delivery once represented Alibaba's largest profit drain, with quarterly losses in the billions, dragging the entire group's EBITA into a steep decline. The rapid narrowing of losses this quarter indicates Alibaba's withdrawal from the food delivery competition, with resources shifting elsewhere.

During the earnings call, Alibaba explicitly stated that instant retail will "accelerate the integration of Hema and Tmall Supermarket" and "focus on expanding front-end warehouses."

Notably, "in the next fiscal year, non-food category transaction volume in instant retail will surpass food categories, driving growth across numerous physical goods categories in e-commerce. The instant retail business is expected to achieve overall profitability by FY2029. In the long term, instant retail could contribute 30% of total transaction volume, becoming Alibaba E-commerce's second growth engine."

In other words, the war hasn't ended—the food delivery battle, dominated by dining, has given way to non-dining instant retail, which clearly offers a larger market space. The battlefield has shifted from subsidies for market share to UE (unit economics) for profitability.

Reflected in the financial report, total revenue reached approximately RMB 269 billion, up 8.6% YoY. Overall adjusted EBITA was RMB 27.3 billion, with the YoY decline narrowing sharply from 84% last quarter to under 30%, slightly better than market expectations. This indicates that the era of high food delivery subsidies nearly depleting group profits is largely over.

Today, China's instant retail business generates RMB 53.3 billion in revenue, up 45%, driven by Hema and Taobao Quick Delivery. Alibaba's instant retail business includes the original Taobao Quick Delivery, Hema, and Tmall Supermarket's one-hour delivery services.

Crucially, high AI investments offer greater imagination than food delivery battles and better align with current market competition needs.

Capital expenditures reached RMB 67.678 billion this quarter, a 75% YoY surge. The AI Labs and Applications segment's losses expanded to RMB 13.861 billion, primarily due to large model R&D and C-end QianWen inference costs. Meanwhile, large-scale T-Head chip deliveries, intelligent computing cluster expansions, and Tongyi large model iterations all represent heavy investments. Freed-up resources are flowing even faster into the AI arena.

The food delivery war isn't over, but it's no longer Alibaba's main battlefield, freeing up profit margins. The AI battle, meanwhile, tests Alibaba's patience for long-term investment and ability to deliver commercialization.