Alibaba reported stronger-than-expected revenue for its fiscal second quarter, driven by accelerating growth in its cloud computing division and rising demand for artificial intelligence services.

The company’s New York-listed shares rose around 3.2% in premarket trading as investors appeared willing to look beyond a sharp decline in profitability and focus instead on renewed momentum in key business segments.

For the quarter ended Sept. 30, Alibaba generated revenue of 247.8 billion Chinese yuan ($34.8 billion), up 5% from a year earlier and above market expectations.

The performance marked a continuation of steady top-line growth even as the company ramps up investments across its AI and quick commerce operations.

Cloud business sees strong AI-driven growth

Alibaba’s cloud computing division, where the company records its AI-related revenue, remains a central focus for investors.

The segment delivered a 34% year-on-year increase in revenue to 39.8 billion yuan, surpassing expectations of 37.9 billion yuan.

This growth rate also improved from the 26% expansion recorded in the June quarter, underscoring rising demand for enterprise AI services.

CEO Eddie Wu said the cloud unit’s momentum was driven by “robust AI demand,” highlighting that AI-related product revenue achieved triple-digit year-over-year growth for the ninth consecutive quarter.

Alibaba has been investing heavily in AI models and infrastructure. In September, the firm said it would increase spending beyond the 380 billion yuan ($53 billion) in investments over three years it announced in February.

The company disclosed it has spent around 120 billion yuan in capital expenditure on AI and cloud infrastructure in the past four quarters.

EBITA for the cloud division rose 35% year-on-year to 3.6 billion yuan, reflecting improved efficiency alongside rising demand.

Alibaba has also emerged as one of China’s leading AI players.

Its Qwen app, positioned as a competitor to OpenAI’s ChatGPT and powered by Alibaba’s proprietary Qwen models, surpassed 10 million downloads in its first week following public release.

Profitability hit by heavy spending in quick commerce

Despite solid revenue and strong cloud performance, Alibaba’s profitability deteriorated sharply.

Adjusted EBITA for the group dropped 78% year-on-year to 9.1 billion yuan.

The company attributed the decline partly to significant investment in the fast-growing but competitive instant commerce market, where Chinese e-commerce platforms are battling to offer rapid delivery of select items.

This segment, which sits within Alibaba’s China e-commerce division alongside Taobao and Tmall, has expanded rapidly but remains capital-intensive.

However, some of these investments are beginning to translate into scale and operational improvements.

The company noted that revenue from quick commerce surged 60% year-on-year in the quarter, up from 12% growth in the prior period, showing accelerating adoption.

China e-commerce revenue overall rose 16% year-on-year to 132.6 billion yuan, with growth outpacing the previous quarter.

Wu said quick commerce showed “significant improvement in unit economics” and contributed to strong increases in monthly active consumers on the Taobao app.

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