Alibaba Group Holding BABA reported its fiscal second-quarter 2026 results on Nov. 25, delivering mixed results that suggest investors should be cautious about the stock’s near-term prospects. (Read more: BABA Q2 Earnings Miss Estimates, Revenues Increase Y/Y)
While the Chinese e-commerce and cloud computing giant managed to beat revenue expectations with RMB 247.8 billion, representing a modest 5% year-over-year increase, the company’s profitability metrics painted a troubling picture. Non-GAAP earnings of just 61 cents per American Depositary Share fell dramatically short of estimates and plummeted 71% from the prior-year period. This concerning divergence between revenue growth and earnings contraction signals fundamental challenges that warrant a cautious stance on the stock.
Collapsing Profitability Despite Revenue Growth
The most alarming aspect of Alibaba’s quarterly performance was the severe compression in profitability across virtually every operational metric. The company’s adjusted EBITDA declined 78%, reflecting the heavy toll of aggressive investments in quick commerce operations and AI infrastructure. While management has positioned these investments as strategic necessities for future growth, the magnitude of the profit deterioration is striking and unsustainable. The quick commerce business, which generated RMB 29.7 billion in revenues with 60% year-over-year growth, has become a significant drain on margins despite claims of improved unit economics. The segment reportedly reduced per-order losses by 50% since mid-2025. However, this improvement was not enough to offset the overall margin pressure across the business.
The deterioration in cash generation capabilities presents another red flag for investors. Operating cash flow collapsed by 68% to just RMB 10.1 billion. Free cash flow turned negative with an outflow of RMB 21.8 billion compared to an inflow of RMB 13.7 billion in the same quarter last year. This dramatic swing reflects the company’s elevated capital expenditure of RMB 31.9 billion directed toward AI and cloud infrastructure, as well as the cash-burning nature of the quick commerce expansion.
Alibaba Group Holding Limited Price and Consensus
Alibaba Group Holding Limited price-consensus-chart | Alibaba Group Holding Limited Quote
Intensifying Competition in the Cloud Business
While Alibaba’s Cloud Intelligence Group delivered revenues of RMB 39.8 billion, up 34%, with AI-related products achieving triple-digit growth for the ninth consecutive quarter, the competitive landscape suggests this performance may be difficult to sustain.
The global cloud market exploded in the third quarter of 2025 to $107 billion, increasing $7.6 billion in just one quarter, as Amazon AMZN-owned Amazon Web Services (AWS), Microsoft MSFT and Alphabet GOOGL-owned Google Cloud continue to dominate global cloud market share. AWS, Google Cloud and Microsoft—combined—won 62% share of the global enterprise cloud infrastructure services market, according to new data from Synergy Research Group.
AWS maintains 29% of the global cloud infrastructure market with stronger margins, while Microsoft Azure commands a 20% share with robust enterprise relationships. Google Cloud has captured 13% with differentiated AI offerings. Amazon continues to demonstrate superior operational efficiency across its cloud operations, Microsoft benefits from enterprise customer lock-in through its integrated software ecosystem, and Google Cloud leverages its technical AI capabilities to win sophisticated workloads. These competitors are taking market share in critical segments, with Amazon maintaining leadership despite Alibaba’s attempts to close the gap, Microsoft showing resilient performance in hybrid cloud deployments, and Google Cloud posting the highest growth rates among major providers.
Valuation Premium Amid Margin Compression
After surging 85.9% year to date, Alibaba’s stock has established a valuation that looks increasingly stretched given the earnings trajectory. The selloff following the disappointing quarterly results, with shares initially rising 3% in pre-market trading before reversing sharply lower, suggests investors are beginning to recognize the disconnect between valuation and fundamental performance.
BABA’s Year-to-Date Performance
Image Source: Zacks Investment Research
The forward 12-month price-to-sales ratio of 2.42 times now trades at a notable premium compared to the broader Zacks Internet-Commerce industry average of 2.13 times. This premium valuation is particularly difficult to justify given the company’s weakening profitability profile and uncertain near-term outlook.
BABA’s P/S Ratio Suggests Stretched Valuation
Image Source: Zacks Investment Research
Conclusion
Given the combination of shrinking profitability, uncertain competitive positioning and premium valuation, investors would be better off considering selling or avoiding Alibaba shares in the near term. BABA stock currently carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).