Alibaba's Profits Have Plummeted: Is BABA Still A Play For AI And Instant Commerce?

Alibaba (BABA) released its Q2 2026 earnings yesterday, November 25. The stock took a hit after that report, but ultimately closed lower as it broke the top line but missed earnings per share (EPS) estimates. Furthermore, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell a whopping 78% year-over-year. The company’s adjusted EBITDA also saw a double-digit decline in the prior quarter.

Meanwhile, despite the pressure on profitability, BABA shares are up a fantastic 85% for the year as of November 25 closing prices. The price action might seem contradictory to the decline in profitability. Still, investors have poured money into the Chinese tech giant this year as it has become the preeminent AI play in the world’s second-largest economy, which Nvidia (NVDA) CEO Jensen Huang said will “win the AI race” before tempering his prediction.

In this article, we’ll discuss whether you should buy Alibaba’s dip or stay away amid the pressure on its bottom line.

Alibaba’s investments in the fast-growing instant commerce business are the main reason its profits are sinking. In fact, if not for that business, Alibaba said its e-commerce group’s EBITDA would have expanded by mid-single digits in the September quarter.

The company has been offering subsidies to consumers to spur the adoption of instant commerce, a segment that is witnessing intense competitive rivalry in China. However, while the instant commerce segment is currently dragging down Alibaba’s profits, it should help boost profits in the long term. Through economies of scale and higher average order values, Alibaba is seeing improvement in the unit economics of that business, and we should see further progress in the coming quarters.

Let’s now delve into Alibaba’s valuations. The stock trades at a forward price-to-earnings (P/E) multiple of nearly 26 times, which might appear inflated since the stock was trading at single-digit P/Es a few quarters ago. However, that argument misses three points. First, low single-digit multiples were not suitable for a tech company like Alibaba, and now that China is doing a 180 and backing its domestic tech giants after the brutal crackdown in 2021, Chinese stock valuations have seen a positive rerating.

Second, Alibaba should get some respect for its valuation given its progress in AI. Its Qwen app surpassed 10 million downloads in the first week of beta launch and is the only Chinese company with a prominent big language model and e-commerce operations. Alibaba has further consolidated its position in China’s AI cloud market with a higher market share than the next three competitors. The company has become a worthy competitor to its Western AI rivals and even developed AI chips, which would not only help it reduce its dependence on third parties, but could become an important line of business as it signs up third-party customers.

Lastly, Alibaba’s current valuations appear high as its earnings have plummeted, which is driving multiples higher. The company’s profits should eventually increase as it leverages AI in other businesses and its cloud business continues to benefit from growing demand. Losses in Alibaba’s instant commerce business should also gradually decline, which will help boost its profits.

Sell-side analysts are also on the same page, and Alibaba’s average price target of $195.29 is 23% higher than the current price, while the Street’s high target price of $240 is almost 52% higher. The stock, which has a “Strong Buy” consensus rating from all 24 analysts surveyed by Barchart, is now very close to its Street Low price target of $152, reflecting extreme pessimism.

In my previous article, I noted that there was an apparent FOMO trade in Alibaba as the stock, which seemed “uninvestable” after the tech crackdown, became a market darling as an AI play in China. While valuations were not in a bubble zone even at the 2025 highs, the stock looks much stronger after the more than 18% drop from the peak.

Overall, I remain bullish on BABA stock and took advantage of the recent drop to add more shares, and would consider adding even more if the stock falls further, which would make it more attractive.

On the date of publication, Mohit Oberoi held a position in: BABA, NVDA. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com

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