Alibaba: China's E-commerce Giant

Alibaba, once the undisputed ruler of Chinese e-commerce, found itself battered by regulatory crackdowns, COVID fallout, and economic uncertainty. Yet in 2025, the company has emerged as China's AI champion, positioning itself at the intersection of cloud computing, e-commerce, and artificial intelligence.

This deep dive explores how Alibaba is transforming from a pure e-commerce giant into a diversified technology powerhouse, what its growing AI capabilities mean for global competition, and whether its 70% rally this year represents a sustainable trajectory or excessive optimism.

Let's dive in.

From E-Commerce Giant to AI Contender

For most Western investors, Alibaba remains synonymous with e-commerce – the "Amazon of China" that connects buyers and sellers through its massive online marketplaces. Yet this traditional view of Alibaba has become increasingly outdated.

Today's Alibaba is a sprawling technology ecosystem with reach extending far beyond online shopping:

• E-commerce remains its core with Taobao and Tmall dominating China's retail landscape

• Cloud computing has emerged as its fastest-growing high-margin business

• Digital media & entertainment provides content through platforms like Youku

• Logistics via Cainiao ensures physical goods move efficiently

• Local services through platforms like Ele.me compete in food delivery and mapping

• International e-commerce through AliExpress, Lazada, and Trendyol

But the most dramatic shift in Alibaba's story is its increasingly central role in China's AI ambitions. At a time when many investors had written off Chinese tech, Alibaba's aggressive investments in AI infrastructure and models have positioned it as perhaps the most credible challenger to Western AI dominance.

The company's CEO, Eddie Wu, made this strategic shift explicit during their recent earnings call:

"We firmly believe that AI is a once-in-a-generation technology that will reshape industries. We're investing $53 billion in AI infrastructure over the next three years... This is much more than just a business expansion – it's a fundamental transformation of our company."

This transformation is already evident in Alibaba's financial structure. While e-commerce still generates the bulk of revenue, the Cloud Intelligence Group is growing significantly faster and delivering expanding margins. More importantly, Alibaba's AI-related revenue within its cloud segment has grown at triple-digit rates for six consecutive quarters.

The real question investors must consider is whether Alibaba can truly compete in a global AI race dominated by American tech giants, or if regulatory and geopolitical constraints will limit its ambitions primarily to the Chinese market.

The Cloud & AI Strategy

At the heart of Alibaba's transformation is its cloud business, which positions the company as a formidable player in the AI infrastructure race.

Alibaba Cloud ranks as the largest cloud service provider in Asia and fourth globally, trailing only AWS, Microsoft Azure, and Google Cloud. This established cloud footprint gives Alibaba a crucial advantage in the AI race – the computing infrastructure necessary to train and deploy advanced models.

The company's AI ambitions rest on three strategic pillars:

1. Foundation Models: Qwen Leading the Charge

Alibaba's Qwen family of large language models has emerged as China's answer to ChatGPT and Claude. The most recent iteration, Qwen 2.5-Max, has demonstrated impressive capabilities, outperforming many competing open-source models on industry benchmarks.

What makes Qwen particularly noteworthy is Alibaba's approach to distribution. Unlike OpenAI's closed models, Alibaba has open-sourced versions of Qwen, building an ecosystem of more than 90,000 Qwen-based models worldwide. This approach mirrors Meta's strategy with LLaMA, fostering developer adoption while maintaining advanced proprietary versions for commercial applications.

Just last month, Alibaba announced a partnership with Apple to power Apple Intelligence features in China, providing significant validation of Qwen's capabilities and cementing Alibaba's position as China's AI leader.

2. Integrated Cloud & AI Services

Rather than positioning AI as a standalone business, Alibaba has deeply integrated AI capabilities into its cloud services. This strategic approach allows the company to deliver immediate value to enterprise customers while building longer-term AI opportunities.

The company offers a comprehensive suite of AI services across its cloud platform:

• GenAI Studio: An enterprise-grade platform for customizing and deploying foundation models

• AI-powered databases: Automated optimization and management

• Intelligent analytics: AI-enhanced data processing and visualization

• Industry-specific solutions: Pre-built AI applications for retail, manufacturing, and finance

This integrated approach has driven a 13% year-over-year increase in cloud revenue last quarter, with AI-related solutions growing at triple-digit rates.

3. Vertical Integration Across the AI Stack

Perhaps most significantly, Alibaba is pursuing vertical integration across the entire AI stack – from silicon to applications. The company has invested in custom AI chip development through its T-Head semiconductor unit, developed its own AI frameworks and tools, and is building specialized infrastructure optimized for AI workloads.

While U.S. export controls on advanced semiconductors present a significant challenge, Alibaba has adapted by:

• Stockpiling Nvidia chips before restrictions tightened

• Developing custom AI accelerators optimized for specific workloads

• Focusing on model architecture efficiency to maximize results from available compute

• Building specialized AI data centers with liquid cooling and high-density configurations

The company's recent DeepSeek partnership further enhances its AI capabilities. DeepSeek, a Chinese AI startup that made headlines with its breakthrough R1 model, is collaborating with Alibaba's Qwen team to develop enhanced solutions for Chinese users.

Growth Amidst Transformation

Alibaba's financials reflect a company in transition – still generating massive cash flow from its e-commerce business while investing heavily in future growth areas. The most recent quarter showed encouraging signs across key metrics:

• Revenue: RMB 280 billion ($38.3 billion), up 8% year-over-year

• Adjusted EBITA: RMB 54.9 billion ($7.5 billion), up 4% year-over-year

• Net Income: RMB 51.1 billion ($7.0 billion), up significantly

The composition of this growth reveals Alibaba's evolving business mix:

E-commerce: The Stable Foundation

Tmall and Taobao remain Alibaba's cash engines, generating steady if unspectacular growth. Customer Management Revenue (CMR) accelerated from 2.5% to 9.4% growth quarter-over-quarter, driven by monetization improvements and higher merchant ad spending.

This traditional business provides the financial foundation for Alibaba's ambitious investments in emerging areas. With approximately 62% of total revenue still coming from domestic e-commerce, even modest growth here significantly impacts overall performance.

International Commerce: Emerging Strength

Alibaba's international e-commerce business has emerged as a surprising growth driver, with revenue jumping 36% year-over-year to reach $4.3 billion. This acceleration comes primarily from:

• AliExpress Choice: Combining Chinese manufacturing with localized logistics

• Trendyol: Strong performance in Turkey and surrounding markets

• Lazada: Improving position in Southeast Asian e-commerce

While this segment still operates with negative EBITA margins as it invests in growth, management expects it to turn quarterly profitable in FY2026, potentially unlocking significant shareholder value.

Cloud Intelligence Group: The Growth Engine

The Cloud Intelligence Group has become Alibaba's most strategic business unit, growing 13% year-over-year to reach $4.4 billion in quarterly revenue. More importantly, adjusted EBITA margin improved sequentially from 9.0% to 9.9%, demonstrating improving economics as the business scales.

Within this segment, AI-related revenue has seen "triple-digit growth" for six consecutive quarters, albeit from a small base. Management has highlighted that customer demand for AI infrastructure has surged following the release of advanced models like DeepSeek R1, driving accelerated capital expenditure plans.

The massive $53 billion capital expenditure commitment over the next three years (approximately $17.7 billion annually) represents a dramatic increase from previous levels and signals Alibaba's determination to compete globally in AI infrastructure.

The GPU Arms Race: Securing AI's Building Blocks

Perhaps the most revealing aspect of Alibaba's AI strategy can be seen in its aggressive procurement of AI chips. According to recent reports, Chinese tech giants collectively spent over $16 billion on Nvidia's H20 data center GPUs in Q1 2025 alone, with Alibaba among the top buyers alongside ByteDance and Tencent.

This purchasing surge represents a 4-6x increase compared to the same period last year, despite concerns about unused AI infrastructure in China. The acceleration appears driven by impending U.S. restrictions on AI chip exports, with new diffusion rules expected to ban Chinese entities from buying American AI GPUs starting in May.

The scale of this investment is staggering – Chinese companies spent nearly as much on Nvidia GPUs in a single quarter as they did throughout all of fiscal 2024. This aggressive stockpiling suggests Alibaba and its peers are preparing for a potential multi-year drought in access to cutting-edge AI hardware.

The company appears to be pursuing a dual strategy – securing as many advanced chips as possible before restrictions take effect while simultaneously investing in model efficiency techniques that can extract maximum performance from available hardware.

The Bull, Bear, and Base Cases

Alibaba's 70% rally in 2025 reflects dramatically shifting investor sentiment, but key questions remain about the sustainability of this performance. Let's examine the bull, bear, and base cases for the company.

The Bull Case: AI Transforms Alibaba's Trajectory

The bullish view sees Alibaba successfully executing its AI strategy and becoming a global technology leader. Key elements of this case include:

• AI as a sustainable growth driver: Cloud revenue accelerates to 25%+ growth rates as AI adoption drives increased spending

• International expansion succeeds: Cross-border e-commerce grows to represent 20%+ of total revenue with improving profitability

• Regulatory headwinds fade: The Chinese government maintains a supportive stance toward national tech champions

• Multiple expansion continues: Forward P/E expands from current 16x to 20-25x as investors recognize Alibaba's technology leadership

The Bear Case: Structural Challenges Overwhelm Potential

The bearish perspective emphasizes ongoing challenges to Alibaba's business model and external constraints:

• E-commerce commoditization accelerates: Increasingly fierce competition from PDD and others erodes Alibaba's core business

• AI investments yield limited returns: Geopolitical constraints and semiconductor access limitations prevent Alibaba from competing effectively in advanced AI

• International tensions escalate: U.S.-China relations deteriorate further, restricting Alibaba's global ambitions

• Multiple compression resumes: Forward P/E reverts to historical range of 10-12x as growth disappoints

The Base Case: Steady Evolution Amid Constraints

The most probable path lies between these extremes, with Alibaba successfully expanding its AI capabilities while navigating significant headwinds:

• E-commerce stabilizes: Core marketplace business maintains low-to-mid single-digit growth with stable margins

• Cloud & AI show selective strength: Cloud business grows 15-20% annually with gradually improving margins

• International expansion continues: Cross-border commerce grows faster than domestic business but remains secondary

• Valuation stabilizes: Forward P/E settles in the 15-18x range, reflecting improved growth prospects balanced against structural challenges

Macro and Geopolitical Considerations

No analysis of Alibaba would be complete without addressing the broader context of China's economy and U.S.-China relations.

China's Economic Transition

After years of disappointing growth, China's economy has shown tentative signs of stabilization in early 2025:

• Retail sales for January-February increased 4% year-over-year, exceeding expectations

• Industrial output grew 5.9%, outpacing forecasts of 5.3%

• Government stimulus measures appear to be gaining traction

However, structural challenges persist, including youth unemployment, property market weakness, and deflationary pressures. The Chinese government's 5% GDP growth target for 2025 remains ambitious given these headwinds.

For Alibaba, this macroeconomic environment creates a mixed picture. Improving consumer sentiment supports e-commerce recovery, while government emphasis on technological self-sufficiency aligns with the company's AI investments. Yet persistent economic weakness could limit upside potential, particularly in consumer-facing businesses.

U.S.-China Tensions

Geopolitical tensions remain the most significant external risk factor for Alibaba. Export controls on advanced semiconductors directly impact the company's AI ambitions, while broader decoupling trends threaten to fragment the global technology landscape.

President Trump's aggressive tariff policies have further complicated the picture. On Wednesday April 2nd, Trump announced a variety of new tariffs to be imposed on a number of countries, with China at the top of this list. While direct impacts on Alibaba's business have been limited thus far, any escalation could further restrict technology transfers and cross-border commerce.

Interestingly, this uncertainty has created a counterintuitive dynamic in 2025 equity markets. As U.S. stocks have declined nearly 6% year-to-date amid tariff concerns, Chinese equities have surged, with Alibaba as a prime beneficiary.

Whether this rotation proves durable will depend largely on how U.S.-China relations evolve under the Trump administration and whether China's economic recovery strengthens.

East Meets AI

Alibaba represents perhaps the most intriguing convergence of China's vast consumer market with the transformative potential of artificial intelligence. The company has successfully repositioned itself from a traditional e-commerce player to a diversified technology leader with legitimate AI aspirations.

While geopolitical constraints and competition will inevitably challenge Alibaba's global ambitions, the company's technical capabilities, financial resources, and strategic vision position it as China's most credible contender in the global AI race.

For investors, Alibaba offers exposure to China's technological evolution at a valuation that, while no longer deeply discounted, remains reasonable relative to growth prospects. The key investment considerations are:

• Execution against AI infrastructure plans: Will the $53 billion investment yield tangible competitive advantages?

• E-commerce resilience: Can core marketplace businesses maintain stable growth and margins?

• International expansion: Will AIDC continue its strong momentum toward profitability?

• Regulatory environment: Will Chinese authorities maintain support for national tech champions?

Alibaba's transformation from e-commerce giant to AI contender represents China's broader technological ambitions. Whether those ambitions can overcome structural and geopolitical constraints will determine not just Alibaba's future, but perhaps the shape of the global technology landscape.

The most probable outcome lies between the extreme bull and bear scenarios - with Alibaba establishing itself as the dominant AI player within China while facing ongoing challenges to its international ambitions.

This suggests a path to modest but sustainable gains for patient investors willing to accept higher volatility and geopolitical risk.

Until next time.

Forward Thesis provides detailed analysis of technology markets and emerging opportunities. The information contained in this article is not investment advice and should not be used as such. Investors should do their own due diligence before investing in any securities discussed in this article. This deep dive is part of our ongoing coverage of the AI semiconductor sector and it’s market implications.