Alibaba reported on Thursday that quarterly revenue rose 9%, yet its shares still fell 6% after net profit plunged 76% under the weight of a surge in artificial intelligence spending.

Revenue for the quarter ended June 30 — the first period of Alibaba's fiscal 2026 — reached 268.95 billion yuan ($39.64 billion), up 9% from a year earlier. Net income fell 76% to 10.54 billion yuan ($1.55 billion). Non-GAAP net income, which removes share-based compensation, investment swings and one-off items, still dropped 38% to 20.72 billion yuan ($3.05 billion), while adjusted EBITA fell 30% to 27.33 billion yuan ($4.03 billion).

Capital spending jumped 75% to fund AI buildout

Alibaba's capital spending accelerated sharply during the quarter. Capital expenditures hit 67.68 billion yuan ($9.98 billion), a 75% jump from the same period a year earlier — money the company tied to AI infrastructure.

The pace tracks a plan laid out in February, when Alibaba committed to at least 380 billion yuan (about $53 billion) of cloud and AI infrastructure investment over three years — more than it spent on such infrastructure in the preceding decade combined. The outlay also mirrors a wider buildout across China's technology sector, where Tencent and ByteDance are among the companies pouring money into AI data centers this year.

The expenditure drained cash. Free cash flow swung to an outflow of 44.67 billion yuan ($6.58 billion), more than double the 18.82 billion yuan outflow recorded a year earlier.

The unit housing Alibaba's model development work, the Qwen consumer app and the QwenWork enterprise agent — the AI Labs and Applications segment — ran an adjusted EBITA loss of 13.86 billion yuan ($2.04 billion), compared with a loss of just 3.22 billion yuan one year ago. Alibaba attributed the wider shortfall to higher inference costs from the Qwen app and deeper investment across its AI stack. Alibaba distributes its Qwen models under open weights, an approach it has framed as a way to seed broad developer adoption that its paid cloud and enterprise products can later monetize.

Cloud carried the quarter

The AI Cloud and Compute Services segment lifted revenue 45% to 48.44 billion yuan ($7.14 billion), a gain Alibaba credited to increased adoption of its AI products. Revenue from AI-related products specifically came in at 12.38 billion yuan ($1.82 billion), marking a 12th consecutive quarter of triple-digit year-over-year growth.

Unlike the AI applications unit, the cloud business generated substantial profit. Its adjusted EBITA rose 133% to 5.63 billion yuan ($830 million).

"We delivered a strong quarter, driven by the improving commercialization of our full-stack AI capabilities," Chief Executive Officer Eddie Wu said in a statement. Alibaba executives have previously said demand for AI compute in China has outstripped available supply.

E-commerce divergence amid $100 billion target

Alibaba's retail engine moved in two different directions. China Quick Commerce revenue climbed 45% to 53.30 billion yuan, while the larger China E-commerce business slipped 8% to 110.90 billion yuan. The 88VIP membership tier grew by double digits to about 64 million members as of June 30.

The quick-commerce surge reflects an instant-retail price war that has intensified across China this year. Alibaba relaunched its Taobao Shangou instant-commerce arm in April with heavy subsidies, squaring off against Meituan and JD.com, which entered food delivery in February and has been spending aggressively to win users.

The results followed a difficult quarter three months earlier, when Alibaba posted adjusted net income of just 86 million yuan and its first operating loss since 2021, both caused by the same AI and quick-commerce bills.

The company has told investors it aims to reach $100 billion in combined annual revenue from cloud and AI within five years. The scale of spending in the just-completed quarter illustrates what pursuing that target will cost before it is achieved. The markers ahead: whether AI product revenue sustains its triple-digit streak, how free cash flow evolves as the infrastructure buildout continues, and whether quick-commerce spending changes as the rivalry with Meituan and JD.com plays out.