Thinking of Buying Alibaba Stock? Here's 1 Green Flag and 1 Red Flag.

Core Viewpoint - Alibaba is undergoing a significant transformation, focusing on artificial intelligence (AI) and cloud computing to redefine its growth story amidst challenges in its core e-commerce business [1][14]. Group 1: AI and Cloud Strategy - Alibaba is transitioning from being solely an e-commerce platform to becoming an AI-native enterprise, with Alibaba Cloud at the center of this shift [4]. - Alibaba Cloud has repositioned itself around AI, integrating with Qwen, its open-source large language model (LLM), which enhances its capabilities beyond traditional cloud services [5][6]. - The open-source strategy for Qwen allows developers to build their own AI applications, positioning Alibaba Cloud to expand into emerging markets and Southeast Asia [7]. - Alibaba plans to invest approximately $50 billion in core infrastructure over the next three years, surpassing its total AI and cloud spending in the past decade, indicating a strong commitment to becoming a leading AI cloud provider [8]. - If successful, AI and cloud computing could serve as Alibaba's primary growth drivers for the next decade, similar to how AWS drives growth for Amazon [9]. Group 2: E-commerce Challenges - Despite the focus on AI, Alibaba's core revenue still heavily relies on domestic commerce, which accounted for 45% of revenue and 113% of adjusted earnings before interest, taxes, and amortization (EBITA) in fiscal year 2025 [10]. - Revenue growth in the e-commerce segment is sluggish, with Taobao and Tmall revenue increasing only 3% in fiscal year 2025 due to weak consumer sentiment and intense competition from rivals like Pinduoduo and Douyin [11]. - Alibaba is attempting to enhance its shopping experiences with AI and reengage merchants and users, resulting in a 9% year-over-year growth in domestic e-commerce revenue in the March 2025 quarter [12]. - Sustaining this momentum is crucial, as structural pressures from competition and shifts in consumer behavior remain significant challenges [13]. Group 3: Investment Implications - Alibaba is at a crossroads, balancing long-term success through AI and cloud initiatives with ongoing challenges in its e-commerce business [14]. - Investors seeking short-term growth may find better opportunities elsewhere, while those willing to wait for the AI strategy to materialize may see potential in Alibaba [15].