ZACKS·2025-10-22 17:56Core Insights - Alibaba's aggressive long-term growth strategy is negatively impacting its short-term financials, with free cash flow turning negative at RMB 18.8 billion in Q1 of fiscal 2026 due to increased capital expenditures of RMB 38.7 billion [1][9] Investment and Growth Strategy - The company is committed to a three-year investment plan of RMB 380 billion ($53 billion) focused on AI and cloud infrastructure, which is expected to maintain pressure on free cash flow in the near term [1][9] - At the Apsara 2025 Conference, Alibaba announced plans to increase AI spending beyond the initial $53 billion budget, emphasizing the belief that AI is a "generational opportunity" [2] - Alibaba Cloud is pursuing a global expansion strategy, including new data centers in Brazil, France, and the Netherlands, with additional locations planned in Mexico, Japan, South Korea, and Dubai [2] Competitive Landscape - Despite leading China's AI cloud market with a 35.8% share, Alibaba faces intense competition from Pinduoduo, ByteDance, and Huawei Cloud, necessitating continued high investment levels to defend its market position [3] - Amazon is projected to exceed $118 billion in capital expenditures in 2025, while Microsoft plans over $80 billion, indicating a highly competitive environment in AI and cloud infrastructure [5][6] Financial Performance and Valuation - Alibaba's stock has increased by 96.6% year-to-date, outperforming the Zacks Internet – Commerce industry and the Zacks Retail-Wholesale sector, which grew by 6.8% and 5.8%, respectively [7] - The stock is currently trading at a forward 12-month price/earnings ratio of 19.74X, lower than the industry's 24.51X, indicating a potential undervaluation [10] - The Zacks Consensus Estimate for fiscal 2026 earnings is $6.57 per share, reflecting a 14.9% decrease over the past 30 days and a year-over-year decline of 27.08% [13]