Alibaba Group Holding has posted a 9% increase in quarterly revenue, as the surging demand for artificial intelligence in China bolsters the need for computing power offered by its cloud division.

For the quarter ending in June, the e-commerce titan reported revenue of nearly 269 billion yuan, broadly in line with analysts' consensus forecasts. However, net profit took a sharp hit, tumbling more than 75% to 10.5 billion yuan. In response, shares of the US-listed company slipped over 2%.

This year, Alibaba has solidified its status as a major player in the global AI arena. Its flagship AI model, Qwen, has become one of the most widely adopted model families worldwide, and the company has poured tens of billions of dollars into areas ranging from chip development to data centers and agentic AI systems.

Yet, as the Hangzhou-based firm challenges rivals like Anthropic PBC and OpenAI, its profit margins are coming under pressure. At the same time, its core online retail business continues to grapple with sluggish consumer spending.

Under the leadership of Chief Executive Officer Eddie Wu, Alibaba is increasingly banking on its AI and cloud operations to fuel future growth. The company has consolidated most of its AI-related research, development, and product teams under Alibaba Token Hub, a new business unit directly overseen by Wu.

Over the past two years, Alibaba has also been divesting non-core assets, including the sale of its gaming business, Lingxi Games, earlier this month. This strategic pivot has positioned Alibaba as one of China's heaviest investors in AI infrastructure.

Wu has made it clear that the company will prioritize AI growth over short-term profitability. He intends to scale up AI investment well beyond the previously announced three-year budget of 380 billion yuan, targeting $100 billion in annual cloud and AI revenue within five years.

However, Chinese AI leaders are facing mounting pressure from investors to convert their hefty AI expenditures into tangible returns. Unlike their US counterparts, these firms currently offer models largely for free or at very low cost. Alibaba appeared to intensify its commercialization efforts earlier this year, but with the release of its newest flagship model, Qwen 3.8 Max, as open-weight, the company has returned to a strategy that prioritizes user scale over profit margins. This marks the first time Alibaba has released weights for its largest model series, a move that will aid AI systems in decision-making processes.

Analysts Catherine Lim and Jason Zhu from Bloomberg Intelligence noted that Alibaba revealed in May that the return on every yuan invested in AI is on the rise. If this trend holds, Alibaba's competitive edge in AI relative to its peers could become more measurable by 2027. They added that while the easing of the food delivery price war is expected to boost operating cash flow, Alibaba's record capital expenditure, driven by its comprehensive strategy from proprietary chips to AI applications, threatens to consume most of that incremental cash.

Alibaba is also targeting paying subscribers through its programming and agent platforms, aiming to carve out a share in a rapidly growing market dominated by competitors such as Tencent Holdings and ByteDance. ByteDance's Doubao is currently China's most popular AI application and introduced a subscription service this year. Alibaba operates the Qwen app, an all-purpose AI assistant capable of handling everyday tasks like shopping and payments. In the coming quarters, it will face direct competition from a new AI assistant set to launch on Tencent's WeChat platform.