Key Takeaways
Despite a stock market rally, China’s economy faces significant challenges, including slowing growth, a property crisis, and weakening corporate earnings, creating a disconnect between investor sentiment and economic reality
Alibaba’s growth is under pressure from declining e-commerce profitability, heavy debt issuance, and intensifying competition, casting doubt on the sustainability of its AI-driven strategy
Alibaba’s AI ambitions reflect broader structural issues in China, where state-driven initiatives often result in overcapacity and limited long-term returns for individual companies
China’s recent stock markets rally has been attracting global investor attention. Yet, a closer look at the economy reveals a contradictory story.
China, the world’s second largest economy, has shown signs of a deepening slowdown in recent months, with key indicators like retail sales, industrial output, and fixed-asset investment all missing expectations. A prolonged property crisis and waning consumer demand are fueling this downward spiral, further exacerbated by the challenges of a stubborn deflationary cycle, in our view.
Slumping Economic Activity
The government’s attempts to revive the economy through interest rate cuts and targeted stimulus have failed to meaningfully boost private investment or consumer spending. A major drag on fixed-asset investment is the renewed slump in the property sector, with August data revealing a ~13% year-over-year drop—the steepest decline since the pandemic’s onset in 2020.1 On-the-ground sentiment remains grim, as new home starts plunged 20% and new sales fell 11% in August, underscoring the sector’s deepening struggles.2
Even exports, which had been a rare bright spot in China’s growth earlier this year, slowed to 4.4% in August from 7.2% in July, falling short of expectations—a clear sign that the impact of 50% US tariffs is starting to weigh more heavily on trade.2 So far, Beijing has managed to offset the decline in shipments to the US by increasing trade with other regions, but the sustainability of this growth remains uncertain as politicians in key markets, such as the EU and Southeast Asia, increasingly advocate for protectionist policies and diversify their supply chains away from China.
Weakening Fixed-Asset Investment
Source: GQG Partners LLC (charts), CEIC, Autonomous Research (data). Data through August 2025. Total Fixed Asset Investment (FAI) growth series was revised in 2018, 2020, 2021, 2023, 2024 and 2025, with some entities/projects taken out to minimize negative drags on the data.
Persistent Physical Property Malaise
Source: GQG Partners LLC (charts), CEIC, Autonomous Research (data). Data through August 2025. Total new starts by area, Primary market property sales, and Property investment data are based on growth rates derived from official nominal data, which differ from new official growth rates.
Poor economic activities are straining the Chinese government’s fiscal receipts, with Autonomous Research analysts projecting the deficit to surge to 9.3% of GDP in 2025—a significantly elevated level compared to Beijing’s target of 4%. This widening fiscal gap is severely limiting Beijing’s ability to deploy aggressive fiscal measures, even as the economy faces mounting pressures and risks of a broader slowdown.
China’s (Already) Extended Fiscal Stance
Foreign Investors Overlooking the Data
It is hard to ignore the stark contrast between a rapidly slowing Chinese economy and the rally in China and Hong Kong stock markets since late June. We think weakening macro fundamentals are making share prices increasingly susceptible to a correction, though the influx of domestic institutional money into Chinese equities could extend this divergence.
In our view, investors are ignoring the fact that the corporate earnings picture is very soft, among other concerning signs. For example, banks have not fully recognized non-performing loans, so the real picture may be far different than what foreign investors perceive.
Another factor fueling the exuberance is the record-breaking level of margin trading, with the outstanding balance of stocks purchased with borrowed funds now surpassing $320 billion.3 Ultimately, we think the test will lie in corporate earnings, which are likely to face headwinds as economic growth continues to decelerate.
Losses Among Chinese Industrial Firms Are Increasingly Pervasive
Source: GQG Partners LLC (charts), BCA Research (data). Data through 31 July 2025. All series shown as 12 month moving averages in local currency.
What about Alibaba Group?
We believe this economic uncertainty and weak earnings extends directly to China’s corporate giants, and Alibaba Group is no exception. While its shares have surged more than 70% year to date, driven by market excitement over advancements in AI chip development and cloud buildup, the underlying fundamentals suggest a less rosy outlook. From narrowing e-commerce margins and intensifying regulatory pressures to a looming cash crunch driven by colossal AI investments, the landscape for Alibaba is far less optimistic than the market’s current exuberance suggests.
At its core, Alibaba remains a company reliant on cash flow from its mature e-commerce operations, which has bankrolled its expansion into high-growth areas like cloud computing and AI. But this approach raises uncomfortable questions: Can Alibaba realistically sustain its AI ambitions while battling cutthroat instant-delivery rivals, especially as its free cash flow deteriorates? Moreover, with the company increasingly resorting to massive bond issuances to fund its growth, how long before its debt-fueled strategy catches up with it? Investors would be wise to question whether the current rally is built on solid fundamentals—or merely on speculative optimism.
Revenue Growth Slows, Non-GAAP Net Income Falls
In the June quarter of 2025 (Q1 FY2026), Alibaba fell short of Wall Street’s revenue expectations, reporting a modest 2% year-over-year increase in total revenue to CNY247.7 billion ($34.8B), compared to analysts’ projections of CNY252.9 billion ($35.6B). This tepid growth underscores the broader stagnation and subdued consumer spending in China. The primary driver of growth was Alibaba Cloud, their comparatively small (~13% of revenue) segment which saw revenue accelerate by 26% in the quarter, fueled by strong demand for AI-related products and services. However, this was offset by a 28% revenue decline in the company’s “all others” segment–an assortment of ancillary businesses, including Cainiao (logistics) and Amap (navigation)–which makes up ~24% of their topline figure.4,5
Though net income came in more than expected, up 78% year over year, it was mainly driven by the company’s equity investments and the sale of its Trendyol local consumer services unit. Excluding these factors, Alibaba’s operating profit dropped 3% year over year, and its adjusted non-GAAP net income tumbled during the quarter.5
Alibaba’s Slowing Topline Growth…
…and Deteriorating Net Income
Source: GQG Partners LLC (chart), Jefferies (data). Data as of 21 September 2025. Content does not constitute investment advice and no investment decision should be made based on it. FY26 includes estimates. Actual results may differ from any projections illustrated above.
Alibaba Disconnect in Next FY Expected EPS vs Share Price
E-commerce Profitability Erosion Amid Competition:
Revenues from its core China e-commerce, which consists of Taobao and Tmall, rose 10% to CNY140 billion ($19.7B) in the latest quarter, representing an acceleration from low-single-digit growth in previous quarters. However, revenue growth did not translate into earnings growth. Alibaba’s adjusted earnings in this division plummeted 21% year over year, driven by heavy investments in instant commerce with competitors.5
After fighting competition from low-priced platforms such as PDD and Douyin, Alibaba has now found itself embroiled in a price war with more formidable rivals, namely JD.com and Meituan. In July, Alibaba announced that it would invest 50 billion yuan (US$7 billion) over 12 months through a subsidy program to boost its instant commerce services.
Alibaba Deteriorating EBITA Margins
Intensifying Regulatory Risks in China:
Alibaba founder Jack Ma has reportedly re-emerged from years of seclusion, which began when the company came under regulatory scrutiny, and he is now taking a more active role in shaping Alibaba’s strategy, particularly in its artificial intelligence initiatives.6
At the same time, China’s top market regulator has intensified efforts to rein in “disorderly competition” and excessive subsidies within the instant-commerce sector. In July, the State Administration for Market Regulation (SAMR) summoned major platforms, including Alibaba’s ele.me, Meituan, and JD.com, to enforce compliance with laws and regulations, prevent harmful competition, and promote industry fairness. All three platforms pledged to resist “vicious subsidies,” improve service quality, prioritize food safety, and support merchants and delivery riders.7 Still, despite these commitments, the price war rages on.
For Alibaba, which recently marked the end of a three-year “rectification” process for its anti-monopoly violations—culminating in a $2.8 billion fine—a pressing dilemma looms: Should it continue engaging in the ongoing price war to defend its e-commerce stronghold, or risk ceding ground to aggressive rivals?
High AI Investments Strain Cash Reserves:
Encouraged by the success of DeepSeek earlier this year, Alibaba is accelerating its AI initiatives with an ambitious CNY380 billion (US$53 billion) investment plan over the next three years. The bulk of this investment will be allocated to data centers and related technologies, including the chips essential for AI development and deployment.6
Unlike its US counterparts, Alibaba is adopting a far more expensive approach by developing chips in house—a strategy driven by US government export controls. T-head, Alibaba’s internal chip design subsidiary, has made notable progress by creating chips capable of supporting both inferencing and post-training processes. Alibaba, ByteDance, and DeepSeek are among the three most used general-purpose large models by Chinese enterprises.8
In the latest quarter ending June, the company’s capital expenditure on AI and cloud infrastructure surged 220% year over year to CNY39 billion (US$5.5 billion).5 At the same time, China’s entire AI application annual recurring revenue was at a mere US$1.5 billion as of August 2025, according to Goldman Sachs.9
As a result, Alibaba’s aggressive spending on AI and instant commerce has significantly strained its cash position. Its net cash generated from operating activities totaled CNY20.7 billion (US$2.9 billion), a 39% decline from the same period of 2024. Free cash flow, a non-GAAP liquidity metric, recorded an outflow of CNY18.8 billion (US$2.6 billion), in sharp contrast to the inflow of CNY17 billion (US$2.4 billion) during the same quarter last year.5
However, in China, tokens and cloud services have become increasingly commoditized, keeping prices persistently low. With no game-changing AI applications on the horizon, it raises the question of how long these Internet giants will continue pouring billions into acquiring GPUs and building out infrastructure.
Flatlining Cash from Operations
Debt-to-Equity Ratio Creeps Up
To fund its expansion, Alibaba has increasingly turned to the bond market. In July 2025, the company issued HK$12 billion (US$1.5 billion) in zero-coupon exchangeable bonds, allowing holders to exchange them for shares in its subsidiary, Alibaba Health Information Technology.10 Following this, in September, Alibaba announced plans to raise $3.2 billion through zero-coupon convertible bonds. These funds are aimed at enhancing its cloud and AI capabilities.11
As a result, Alibaba’s debt-to-equity ratio has climbed to approximately 25%, likely reaching its highest point since 2018. Nevertheless, the market can expect more bond offerings from Alibaba soon.12
Is the Rally Justified?
We believe that the market’s excitement around Alibaba’s AI advancements and cloud buildup may be overlooking critical challenges. While the promise of AI breakthroughs is undoubtedly alluring, investors should question whether the company’s current rally is built on solid fundamentals or speculative optimism. In a slowing economy where corporates and consumers are all tightening their belts, Alibaba’s reliance on e-commerce cash flow to bankroll its AI ambitions appears increasingly dubious. Add to this a mounting pile of debt and intensifying competition, and the risks become difficult to ignore.
Despite all the excitement, there has been no earnings growth with Alibaba. In fact, earnings estimates have been revised downward this year, as has been the case in previous years. We think the Chinese market has done well simply because of multiple expansion and forward PE is on the higher side of the long-term range while estimates have been trimmed again recently.
MSCI China, Forward 12M P/E vs Long Term Average
Long Term Earnings Growing Seemingly Nowhere
Even Shorter-Term Estimates Getting Trimmed
JD.com: Estimated EPS for FY2 vs Share Price
As long-time observers of China, we remain intrigued by how swiftly market leaders can be disrupted, whether due to regulatory pressures or the emergence of fierce competition. A prime example is Pinduoduo, which seemingly came out of nowhere to capture a significant share of the e-commerce market. Against this backdrop, we view Alibaba’s ambition to position itself as a leader in artificial intelligence as somewhat misplaced. Here is a legacy company attempting to compete not only with a wave of aggressive AI startups—often referred to as “AI tigers”—developing their own models and applications but also with established giants like Huawei, ByteDance, Tencent, and Baidu.
History suggests that state-driven industry support in China often leads to overcapacity, benefiting the broader economy but rarely translating into sustained stock market returns for individual companies. We have seen this dynamic play out repeatedly, such as in the solar energy sector, where aggressive capacity expansion ultimately led to significant value destruction for many firms. Alibaba’s foray into AI risks following a similar path, as competition intensifies and the market grows increasingly saturated.
In this context, the government’s emphasis on advancing AI—highlighted by the State Council’s high-level directive on implementing the “AI Plus” policy—will likely result in overcapacity, in our view. Already, there are reports of excessive data center buildouts, many of which involve assets with limited lifespans. Local governments have supported the development of facilities across the country, but this has led to overcapacity concerns in the Chinese data center market. According to Reuters, the state is now exploring the creation of a national, state-run cloud service to utilize the surplus computing resources.
In many ways, Alibaba’s trajectory reflects the story of China itself: a legacy powerhouse striving to reinvent itself amid economic headwinds and structural challenges. For investors, the key question remains whether this reinvention can generate lasting value—or if the current optimism surrounding the company’s AI ambitions will eventually give way to a sobering market correction.
END NOTES
1Hong, Iris. “China Home Price Decline Quickened in August, Strengthening Case for Fresh Stimulus.” Mingtiandi. 15 September 2025.
2“National Economy was Generally Stable with Steady Progress in August”. National Bureau of Statistics of China. 15 September 2025.
3Bloomberg News. “China’s Margin Trades Surge to a Record Amid Stock Rally”. Bloomberg. 2 September 2025.
4“Alibaba Group Announces June Quarter 2025 Results” Nasdaq. 29 August 2025.
5”Alibaba June Quarter 2025 Results”. Alibaba Group. June 2025.
6”Bloomberg News. “Jack Ma Returns with a Vengeance to “Make Alibaba Great Again””. Bloomberg. 15 September 2025.
7Feng, Coco. “China’s Top Market Regulator Summons Alibaba, Meituan, JD.com Over Delivery Price War”. SCMP. 19 July 2025.
8”Alibaba, Baidu begin using own chips to train AI models, The Information reports”. Reuters. 11 September 2025.
9wallstreetcn. ”Goldman Sachs: The narrative around China’s AI infrastructure has reignited”. MooMoo Technologies Inc. 16 September 2025.
10Fioretti, Julia. ”Alibaba Raise $1.5 Billion from Sale of Exchangeable Bonds”. Bloomberg. 3 July 2025.
11”Alibaba Group Announces Proposed Offering of Approximately HK$12 Billion of Zero Coupon Exchangeable Bonds”. Alibaba Group. 3 July 2025.
12”Alibaba’s Debt to Equity Ratio”. Macrotrends.com.
DEFINITIONS
The debt-to-equity (D/E) ratio is a financial leverage metric that compares a company’s total liabilities to its shareholders’ equity, indicating the proportion of debt used to finance assets versus equity. A higher ratio suggests greater financial risk, as the company relies more on debt, while a lower ratio signals more financial stability and a conservative approach.
Earnings Per Share (EPS) is a measure of a company’s profitability, calculated by dividing quarterly or annual income (minus dividends) by the number of outstanding stock shares.
EBITA: Earnings Before Interest Taxes and Amortization.
Free cash flow (FCF) is the cash a company generates after covering its operating expenses and capital expenditures. It represents the discretionary cash a business can use to repay debt, pay dividends, fund buybacks, or invest in new growth opportunities.
The Price-to-Earnings (P/E) ratio is a stock valuation metric that divides a company’s share price by its earnings per share (EPS), indicating what investors are willing to pay for each dollar of a company’s earnings. A higher P/E suggests investors expect higher future earnings, while a lower P/E may indicate a stock is undervalued or has lower growth potential.
GAAP: Generally Accepted Accounting Principles
Non-GAAP net income is a modified version of a company’s net income that removes certain one-time, non-recurring, or non-cash expenses or gains, as determined by the company’s management. Companies present non-GAAP net income to provide a potentially clearer view of their core operational performance by eliminating items that they believe distort the true, ongoing profitability of the business.
Operating cash flow (OCF) measures the actual cash a company generates from its core, day-to-day business activities, like selling products or services. It’s a more accurate indicator of financial health than net income because it’s less subject to manipulation and shows a company’s ability to fund operations, growth, and obligations.
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