Alibaba Stock Plunges 14.4% in 3 Months: Time to Buy, Sell or Hold?

Core Insights - Alibaba Group (BABA) has faced a challenging quarter, with shares dropping 14.4% over the past three months due to declining profitability metrics despite revenue growth [1][7] - The fiscal second-quarter 2026 results revealed a significant disconnect between revenue growth and profitability, raising concerns among investors about the current investment strategy [1][18] Financial Performance - Revenues reached RMB 247.8 billion, a 5% year-over-year increase, slightly exceeding consensus estimates [3] - Non-GAAP diluted earnings fell 71% year-over-year to RMB 4.36 per American Depositary Share, missing consensus estimates by 7.58% [3] - Income from operations plummeted 85% year-over-year, from RMB 35.2 billion to RMB 5.4 billion, while adjusted EBITA declined 78% [4] - Operating margins contracted from 15% to 2%, raising concerns about the investment thesis [4] - Free cash flow shifted from a positive RMB 13.7 billion inflow to a RMB 21.8 billion outflow, driven by capital-intensive investments [4] Cloud Business and Strategic Initiatives - The Cloud Intelligence Group reported a 34% year-over-year revenue growth to RMB 39.8 billion, indicating a strategic pivot towards AI [5] - AI-related products have shown triple-digit growth for nine consecutive quarters, with the Qwen AI assistant surpassing 10 million downloads shortly after its release [5] - Despite cloud growth, profitability improvements remain elusive, as the core e-commerce business faces intense competition, leading to increased promotional spending [6] Competitive Landscape - Alibaba's strategic shift towards becoming a comprehensive technology and AI platform introduces execution risks that are not reflected in its current valuation [7] - The company is pursuing advanced semiconductors, which are subject to geopolitical vulnerabilities and regulatory uncertainties [8] - Alibaba's share price decline contrasts sharply with the performance of global technology peers, highlighting relative weaknesses in investor perception [9] Valuation Concerns - Alibaba's forward 12-month price-to-sales ratio of 2.28 times is at a premium compared to the Zacks Internet-Commerce industry average of 2.1 times [15] - The stock's valuation demands investors pay above-market multiples for a business facing severe margin compression and negative free cash flow generation [15] Conclusion - The combination of declining profitability, high capital expenditure requirements, uncertain AI monetization timelines, and premium valuation suggests a challenging risk-reward profile for near-term investors [18] - Investors may consider reallocating capital towards technology peers that have demonstrated better execution in balancing growth investments with current financial performance [18]