Alibaba Q2 Revenue Beats Estimates as AI-Driven Cloud Growth Surges 34%, Offsetting Profit Decline

Alibaba Group reported second-quarter fiscal 2026 results that exceeded revenue expectations but missed earnings forecasts, with shares rising on strong AI and cloud momentum. Revenue reached RMB 247.8 billion ($34.8 billion), topping estimates of RMB 245.2 billion, while adjusted earnings per ADS of RMB 4.36 yuan fell short of the RMB 6.34 yuan consensus. Net income dropped 53% as the company invested heavily in AI infrastructure and quick commerce initiatives.

The standout performance came from Alibaba Cloud, which posted 34% year-over-year revenue growth driven by overwhelming AI demand. Management disclosed that AI-related products now account for over 20% of cloud revenue from external customers, with the company struggling to keep pace with customer demand. CEO Eddie Wu expressed confidence that AI resources will remain in short supply for the next three years, dismissing concerns about an AI bubble emerging in that timeframe.

China's e-commerce business grew 16% year-over-year, benefiting from investments in one-hour delivery services that attracted more users to Alibaba's shopping platforms. The company's new AI application Qwen surpassed 10 million users in its first week of public beta and will gradually integrate e-commerce, navigation, and local services.

Despite the positive revenue trends, operating margin compressed to 2% as Alibaba committed RMB 380 billion over three years to AI development. Management warned that near-term profitability will fluctuate due to these strategic investments and acknowledged potential supply chain constraints in server construction at current growth rates. Starting next quarter, cloud growth may decelerate due to base effects.

Benchmark maintained its Buy rating with a $195 price target, while Macquarie reiterated Outperform with a $218.80 target, viewing Alibaba as a mispriced AI cloud opportunity.