BREAKINGVIEWS-Alibaba's $100 bln AI goal reassures no one

he author is a Reuters Breakingviews columnist. The opinions expressed are her own. Updates to add graphic

By Robyn Mak

HONG KONG, March 20 (Reuters Breakingviews) - Revenue targets can be a double-edged sword: they signal a company is serious about growth but they can also herald higher spending. China's $298 billion Alibaba 9988.HK needs to work harder to convince investors that its new expansion goal won't come at the expense of profitability.

Against a dismal 67% year-on-year plunge in quarterly earnings, Alibaba boss Eddie Wu on Thursday revealed a target to hit $100 billion in artificial intelligence and cloud computing sales from external customers within five years. That implies an average annual growth rate of over 40%, up from the December quarter's 35% pace.

Wu reckons that extra growth will come from consumers and enterprises across the People's Republic. They have been reluctant spenders on IT services and upgrades but they are increasingly deploying AI agents that carry out tasks from editing documents to updating spreadsheets, and will need to pay companies like Alibaba to use their models and other services. To better tap this trend, Alibaba has restructured its AI units into a newly-formed "Token Hub Business Group". Earlier this week, the company launched a platform for businesses to manage multiple AI agents.

To hit the revenue goal, Alibaba will almost certainly need to spend more to build out its AI capabilities - including training frontier models - and win customers. That's because its established rivals Tencent 0700.HK and ByteDance, and upstarts led by MiniMax 0100.HK and Zhipu 2513.HK, are all in the same race. Wu is for now sticking to last year's guidance of spending 380 billion yuan, or $55 billion, in cloud computing and AI infrastructure over three years but that projected outlay doesn't include talent and other expenses. Margins at the Cloud Intelligence Group are currently 9%, using the company's preferred metric of earnings before interest, taxes and amortisation (EBITA).

The threat of lower profitability comes at a time when Alibaba's core Chinese commerce business is grappling with a consumer spending slowdown and subsidy wars. Sales in that division grew just 6%, to 159 billion yuan, in the latest quarter. Yet EBITA plunged 43% year-on-year, overshadowing the 25% jump in Alibaba's cloud and AI arm.

Little wonder investors wiped 7% or $20 billion off Alibaba's New York shares after the earnings release. Using a conservative 10 times multiple on the 196 billion yuan in forecast 2027 domestic e-commerce profits, Alibaba's current worth implies investors are ascribing essentially zero value to its cloud and AI business, analysts at JPMorgan reckon. But with the stock already underperforming smaller AI rivals this year, winning back investor faith will be a long slog.

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CONTEXT NEWS

Chinese e-commerce company Alibaba on March 19 reported revenue of 284.8 billion yuan ($41.3 billion) in the three months ended December 31, an increase of 2% from a year earlier. Adjusted earnings fell 67% year-on-year in the period, to 16.7 billion yuan.

CEO Eddie Wu told analysts in a call following the earnings results that "Over the next five years, our goal is to surpass $100 billion in combined cloud and AI external revenue".

Alibaba's New York stock closed down 7.1%, to $124.9 on March 19.

(Editing by Una Galani; Production by Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on MAK/ robyn.mak@thomsonreuters.com))