3 Reasons Why Alibaba Stock May Be a Smart Sell After Q2 Earnings Miss

Core Insights - Alibaba Group Holding (BABA) reported mixed fiscal Q2 2026 results, with revenue of RMB 247.8 billion, a 5% year-over-year increase, but non-GAAP earnings of 61 cents per American Depositary Share, a 71% decline from the previous year, indicating fundamental challenges ahead [1][8] Revenue and Profitability - The company's adjusted EBITDA fell by 78%, primarily due to aggressive investments in quick commerce and AI infrastructure, raising concerns about the sustainability of profit margins [2] - Quick commerce generated RMB 29.7 billion in revenue, growing 60% year-over-year, but remains a significant margin drain despite a reported 50% reduction in per-order losses since mid-2025 [2] Cash Flow and Expenditures - Operating cash flow decreased by 68% to RMB 10.1 billion, while free cash flow turned negative with an outflow of RMB 21.8 billion, contrasting with an inflow of RMB 13.7 billion in the same quarter last year, driven by high capital expenditures of RMB 31.9 billion [3] Cloud Business Performance - Alibaba's Cloud Intelligence Group reported revenues of RMB 39.8 billion, a 34% increase, with AI-related products achieving triple-digit growth for nine consecutive quarters, but the competitive landscape poses challenges for sustaining this performance [4] Competitive Landscape - The global cloud market reached $107 billion in Q3 2025, with AWS, Microsoft, and Google Cloud dominating 62% of the market share, indicating a tough competitive environment for Alibaba [5][6] - AWS holds 29% of the global cloud infrastructure market, Microsoft Azure commands 20%, and Google Cloud has 13%, showcasing strong operational efficiencies and customer lock-in strategies among competitors [6] Valuation Concerns - Alibaba's stock has surged 85.9% year-to-date, but the valuation appears stretched with a forward 12-month price-to-sales ratio of 2.42, compared to the industry average of 2.13, raising concerns about justifying this premium amid declining profitability [9][12] Conclusion - The combination of shrinking profitability, uncertain competitive positioning, and premium valuation suggests that investors may consider selling or avoiding Alibaba shares in the near term [15]