Alibaba is looking to raise approximately $10 billion through a share sale in Hong Kong to ramp up its artificial intelligence spending. However, this move is anticipated to exert more pressure on returns rather than providing assistance, leading to a negative market reaction. Senior analysts highlight a "depression" affecting the China tech sector, including Tencent and Baidu, and now Alibaba.
While Alibaba has a clear AI strategy, the financial cost to its business is substantial. The company's capital expenditure (CAPEX) for AI infrastructure more than doubled sequentially to $10 billion in a single quarter. Despite this massive investment, the increase in operating profit for its key Cloud Intelligence business was only $420 million. Analysts project Alibaba's total CAPEX for the year to be close to $40 billion, with quarterly profit growth only a fraction of this, indicating a low return on investment.
Alibaba's free cash flow generation has turned negative, necessitating capital raising for a business described as a utility service with poor financial returns. This share placement introduces dilution and raises questions, particularly since Alibaba previously had strong balance sheet strength and a solid net cash position. Some analysts suggest a potential misjudgment of market sentiment, noting that for a company with a net cash position, issuing debt might have been a more prudent option than equity.
Renowned investor Michael Burry, who was reportedly considering reallocating funds back to Alibaba, is now said to be reconsidering due to this development. Overall, the market views Alibaba's AI strategy, given the significant CAPEX, as "value destructive" in pure financial terms, directly impacting investor sentiment and the stock price.
