Alibaba Q2 Earnings Preview: AI Cloud Business Soars 45%, E-Commerce Faces Key Test

Alibaba (09988-HK) is set to release its first-quarter financial results for fiscal year 2027 (Q2 2026), with markets closely watching the diverging performance across its business segments. Despite weak overall consumer demand, the company's cloud business continues to grow rapidly, driven by artificial intelligence (AI), becoming its primary growth engine. Meanwhile, its core e-commerce business, impacted by price wars and accounting adjustments, has seen slowed growth but is gradually returning to a more rational trajectory, with the effectiveness of its transformation efforts being a key focus of this earnings report.

Fueled by the AI wave, Alibaba Cloud has emerged as the group's main growth driver. Citigroup's latest research report has slightly raised its revenue forecast for Alibaba's second quarter to RMB 269.8 billion (approximately USD 37.8 billion), representing a year-on-year increase of about 8.9%, surpassing market consensus.

The cloud computing segment stands out particularly, with its revenue growth forecast upgraded from 40% to 45%. Single-quarter revenue is expected to reach RMB 48.4 billion, with operating margins projected to significantly improve to 11.5%.

This growth is underpinned by Alibaba's dual strategy of strengthening its AI product portfolio and expanding its global infrastructure. From the highly anticipated video generation model HappyHorse-1.1 to the unified AI matrix integrating enterprise collaboration agents and execution engines, Alibaba is accelerating the monetization of its technological advantages.

Simultaneously, the company is aggressively expanding data centers globally, reinforcing its leadership in the public cloud market. The commercialization of AI is transforming cloud computing from a basic infrastructure service into a high-growth AI ecosystem.

E-commerce Advertising Revenue Faces Short-Term Headwinds

In contrast to the rapid expansion of its cloud business, Alibaba's core e-commerce segment is under pressure this quarter.

Analysts have significantly lowered their expectations for customer management revenue (CMR), forecasting an 8.7% year-on-year decline. This reflects the weak macroeconomic backdrop of sluggish consumer demand, particularly in key categories such as home appliances and cosmetics.

Additionally, the reverse revenue accounting treatment during the 618 shopping festival has amplified this trend, resulting in significant short-term pressure on financial statements.

Despite the CMR setback, the profitability of Alibaba's overall e-commerce segment remains stable. Thanks to effective control of losses in instant retail operations such as Taobao Now, the China commerce segment's EBITA is expected to remain around RMB 38 billion.

This profit stability stems from Alibaba's more prudent operating strategy, aiming to balance market share with unit economics.

Instant Retail Competition Becomes More Rational

Over the past year, subsidy wars in the instant retail market drew significant attention, but with regulatory intervention and industry self-discipline, competition has notably cooled down.

Under the leadership of the Beijing Municipal Market Supervision Administration, major platforms including Meituan, Taobao Now, and JD.com have reached a consensus on fee rates, subsidies, and service standards, effectively restoring order to the competitive landscape.

For Taobao Now, the second quarter marks a turning point in its operational goals. The company has shifted its focus from blind subsidy-driven expansion to stabilizing market share and improving business quality and efficiency.

Although daily order volume has adjusted from last year's peak, the business structure is becoming healthier. The company will now prioritize high-average-order-value local retail fulfillment, aiming to achieve monthly unit-level profitability per store within the year.

Valuation Reset Reflects Deepening Business Restructuring

Notably, Citigroup has adjusted its target prices for Alibaba's U.S. and Hong Kong shares to USD 192 and HKD 191, respectively, using a sum-of-the-parts (SOTP) valuation approach. This adjustment is not only based on macroeconomic conditions but more fundamentally on a reassessment of valuation multiples for each business segment.

With Alibaba planning to merge AIDC into its China commerce group and transfer its Pingtouge semiconductor unit to the Cloud Intelligence Group, a deep strategic integration of internal operations is underway.

While the target price adjustment reflects market caution toward short-term business volatility, most rating agencies have maintained a "Buy" rating, indicating confidence in Alibaba's long-term competitiveness following its business restructuring.

For investors, the upcoming earnings release will be a critical moment to assess the monetization of AI in the cloud business, the recovery of profitability in the e-commerce segment, and the overall impact of business reorganization.

Alibaba is pursuing a high-quality growth path in a complex market environment through its dual strategy of "strengthening the cloud" and "stabilizing e-commerce."