Alibaba Doubles Down on AI Margins: Time to Hold or Cut Your Losses?

Alibaba Group's BABA aggressive AI strategy is rapidly becoming an expensive gamble that threatens to destroy shareholder value rather than create it.Despite appearing cheap on traditional metrics, Alibaba represents a classic value trap where superficial attractiveness masks deeper structural problems. Alibaba continues to trade at a premium valuation with a Value Score of C. The market has priced in AI upside while underestimating execution risks and capital intensity required for meaningful transformation.While management trumpets AI as the company's salvation, the underlying fundamentals reveal a deteriorating business model facing relentless competitive pressure and unsustainable capital requirements that make BABA a clear sell for 2025.Alibaba Group Holding Limited Price and Consensus Alibaba Group Holding Limited price-consensus-chart | Alibaba Group Holding Limited QuoteMargin Compression Accelerates Despite AI HypeThe most alarming development for Alibaba investors is the accelerating margin deterioration masked by AI revenue growth narratives. Mizuho expects Alibaba to experience meaningful margin contraction in the second quarter, with competitive pressure affecting margins continuing through the second half of 2025 and into 2026. The investment bank has slashed its June 2025 quarter EBITDA forecast from 55 billion RMB to 45 billion RMB, representing an 18% reduction that signals serious profitability concerns.More troubling is the company's cash flow destruction. Free cash flow plummeted 76% to RMB3,743 million compared to RMB15,361 million in the same quarter of 2024, mainly attributed to increased cloud infrastructure expenditure. This dramatic deterioration exposes the hidden cost of Alibaba's AI ambitions - massive capital expenditures that are hollowing out the company's financial strength while delivering questionable returns.The cloud business, supposedly Alibaba's crown jewel, requires enormous ongoing investment just to remain competitive. Despite triple-digit AI product revenue growth for six consecutive quarters, these gains come at an unsustainable cost structure that suggests the business model is fundamentally flawed rather than temporarily challenged.Competitive Annihilation From Multiple FrontsAlibaba faces an unprecedented competitive assault that threatens its core market position. Competition in China's e-commerce and cloud markets continues to intensify. Domestic rivals like PDD Holdings PDD and ByteDance's Douyin maintain pressure on e-commerce operations, while international cloud providers like Microsoft MSFT and Amazon AMZN compete for enterprise customers. With the stock declining 7.9% over the past six months while underperforming the Zacks Internet-Commerce industry and the Zacks Retail-Wholesale sector, investors are paying elevated prices for a deteriorating business.BABA Underperforms Peers & Sector in 6 MonthsImage Source: Zacks Investment ResearchPDD Holdings reported 94% year-over-year rise compared to Alibaba's 9% growth in the same quarter, demonstrating how quickly market dynamics can shift against established players. The emergence of social commerce and live-streaming sales channels represents an existential threat to Alibaba's traditional marketplace model, requiring massive investment in areas where the company lacks competitive advantages.Douyin increased gross merchandise volume (GMV) by 46% year over year between August 2023 and July 2024, while Alibaba's flagship marketplaces Taobao and Tmall posted only 5% GMV growth. This stark performance gap illustrates how rapidly Alibaba is losing market share to more agile competitors. Douyin is integrating its supermarket and hourly delivery services, heating up competition in China's instant commerce sector against Alibaba. This forces Alibaba into expensive defensive battles across multiple fronts while competitors focus resources on specific market segments.Regulatory and Earnings DeteriorationThe regulatory environment continues deteriorating with new e-commerce rules requiring platforms to reduce merchant fees, directly pressuring Alibaba's already-strained margins. The Zacks Consensus Estimate for fiscal 2026 earnings indicates a decline of 4.77% year-over-year to $8.58 per share. The market appears to be pessimistic about Alibaba's growth trajectory. This continued earnings contraction occurs despite modest revenue growth, highlighting operational inefficiencies and competitive pressure.Image Source: Zacks Investment ResearchThe company's strategic AI pivot requires patience and capital that rational investors should be unwilling to provide, given superior alternatives available in both technology and e-commerce sectors. Alibaba's transformation story may eventually succeed, but the execution risks, competitive threats, and capital intensity make it an unsuitable investment for 2025.ConclusionInvestors seeking growth should look elsewhere rather than hoping Alibaba can successfully navigate its mounting challenges while simultaneously funding an expensive AI transformation. The risk-reward profile simply doesn't justify maintaining exposure to this deteriorating situation. BABA stock currently carries a Zacks Rank #5 (Strong Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.See our %%CTA_TEXT%% report – free today!7 Best Stocks for the Next 30 DaysWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Amazon.com, Inc. (AMZN): Free Stock Analysis Report Microsoft Corporation (MSFT): Free Stock Analysis Report Alibaba Group Holding Limited (BABA): Free Stock Analysis Report PDD Holdings Inc. Sponsored ADR (PDD): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks