BABA's Margins Suffer From Stiff Competition: Time to Sell the Stock?

Core Insights - Alibaba Group Holding's second-quarter fiscal 2026 results reveal significant challenges, prompting a reassessment of investment positions as the company faces severe margin compression despite modest revenue growth [2][10] Financial Performance - The company reported revenues of RMB 247.8 billion for the September quarter, reflecting a 5% year-over-year growth, with a 15% increase on a like-for-like basis when excluding divested businesses [3] - Non-GAAP earnings were reported at 61 cents per ADS, falling short of the Zacks Consensus Estimate by 7.58%, with non-GAAP diluted earnings in domestic currency at RMB 4.36, down 71% year over year [3] Competitive Landscape - Margin deterioration is attributed to hyper-competition, with sales and marketing expenses more than doubling to RMB 66 billion as the company strives to maintain market share against rivals like JD.com and Pinduoduo [4] - The food delivery sector has intensified competition, particularly with JD.com's entry into the delivery space, leading to subsidized pricing battles that threaten margin recovery [8][12] Strategic Investments - A concerning 78% decline in adjusted EBITDA is largely due to cash-burning investments in the Quick Commerce business, despite management reporting improved unit economics [6] - Approximately RMB 120 billion has been allocated towards AI and cloud infrastructure over the past four quarters, indicating aggressive spending without clear return timelines [6][11] Cloud Segment Performance - The Cloud Intelligence Group saw a revenue increase of 34% year over year to RMB 39.8 billion, but this growth is insufficient to offset the core e-commerce margin deterioration [9] - Supply chain constraints are acknowledged as limiting the pace of AI infrastructure deployment, indicating execution challenges even in this growth segment [9] Valuation Concerns - Alibaba's forward 12-month price-to-sales ratio stands at 2.61 times, a premium compared to the broader Zacks Internet-Commerce industry average of 2.25 times, suggesting limited valuation support amid deteriorating fundamentals [13] - The stock's 1% return over the past three months contrasts sharply with global technology peers, reflecting investor awareness of the company's challenges [16] Competitive Positioning - Compared to global technology leaders like Amazon, Microsoft, and Alphabet, Alibaba's competitive position appears precarious, struggling to match operational excellence and profitability [17]