(Yicai) May 14 -- Alibaba Group Holding’s shares rose after the Chinese tech giant doubled its quarterly profit and said artificial intelligence is becoming a major revenue driver, prompting Chief Executive Eddie Wu to signal confidence in returns over the next three to five years from an AI spending spree that could “overshoot” an initial CNY380 billion (USD53 billion) target.

Alibaba [HKG: 9988] closed 3.8 percent higher at HKD137.90 (USD17.61) per share in Hong Kong today. In pre-market trading in New York, its American Depositary Receipts [NYSE: BABA] were down 3.6 percent at USD140.69 as of 4.01 a.m. local time, after climbing 8.2 percent yesterday.

Net profit jumped 106 percent to CNY25.5 billion (USD3.7 billion) in the March quarter from a year ago, the Hangzhou-based firm’s earnings report showed yesterday, mainly thanks to mark-to-market gains from equity investments and year-earlier losses on the disposal of Sun Art and Intime. Based on non-generally accepted accounting principles, profit was CNY86 million (USD12.7 million) versus CNY29.8 billion a year ago.

Revenue rose 3 percent to CNY243.4 billion (USD35.3 billion), with that from the Cloud Intelligence Group surging 38 percent to CNY41.6 billion and from external customers 40 percent, fueled by enterprise adoption of AI services.

“Alibaba's AI has moved beyond the initial investment phase and progressed commercialization at scale,” Wu said on the firm’s earnings conference call. “Over the past quarter, Alibaba's high-intensity investment in our two strategic priorities of AI + Cloud and consumption is rapidly translating into tangible business results.”

AI product revenue, which has an annualized run rate of CNY35.8 billion, had triple-digit growth for the eleventh straight quarter and now makes up 30 percent of the Cloud Intelligence Group's external revenue. The customer base for Alibaba's one-stop model service platform Model Studio grew eightfold in the period.

AI model and application services annualized recurring revenue is expected to exceed CNY10 billion this quarter and CNY30 billion by the end of the year, management indicated, with AI-related revenue expected to account for more than 50 percent of total external cloud business’ income within about a year.

AI Investment, ROI

“We will overshoot the original capex figure that we had stated of CNY380 billion” in AI infrastructure over the next five years, Wu said.

“We see the ROI on this investment in the next three- to five-year period as being extremely clear,” he noted.

Alibaba’s negative free cash flow, which swung to an outflow of CNY17.3 billion last quarter from an inflow of CNY3.7 billion a year earlier, was "primarily due to the very significant investments we've been making in AI over the past year," Xu said. "We've been extremely resolute in making those investments precisely because we've seen the historic opportunity of AI.

"What we're doing today is investing capital to build two factories: an AI training factory and an inferencing factory," Wu noted.

Alibaba may also collaborate with service providers to jointly build data centers by selling AI servers developed by its unit T-Head Semiconductor, according to Wu.

Alibaba is at "a pivotal inflection point in the evolution from conversational chatbots to autonomous AI agents, which is directly driving explosive growth across three core workload categories: training, inference, and agent orchestration," Wu said. Supply is struggling to keep pace, with not a "single card on our servers that is idle," he noted.

E-Commerce

Revenue from Alibaba's China e-commerce business rose 6 percent to CNY122.2 billion in the quarter, but relevant earnings before interest, taxes, and amortization dropped 40 percent to CNY24 billion. Customer management income climbed just 1 percent, but 8 percent on a like-for-like basis, excluding the accounting impact of a revamped merchant subsidy program.

Excluding losses from instant commerce, Alibaba's China e-commerce EBITA would have been stable year on year, noted Chief Financial Officer Toby Xu. Instant commerce revenue surged 57 percent to CNY20 billion, with orders jumping 2.7 times.

Alibaba E-commerce has achieved "a very fundamental shift" in market position, said Jiang Fan, CEO of the segment. Unit economics will turn positive by the end of fiscal year 2027, Jiang said, adding that 88VIP membership numbers surpassed 62 million, continuing double-digit year-over-year growth.

The international digital commerce segment's adjusted EBITA loss narrowed to CNY138 million from CNY3.6 billion, driven by logistics optimization and efficiency gains at AliExpress. The business is expected to turn profitable over the next two years, Xu pointed out.

Alibaba will pay about USD2.5 billion in annual cash dividends, or USD1.05 per ADR.

Editor: Martin Kadiev