On Monday, Alibaba priced a new batch of shares at approximately $10.2 billion. It will invest all the proceeds in artificial intelligence, from chips and data centers to model development. The market reacted negatively. The company’s Hong Kong-listed shares fell 9.8 percent during morning trading to 111 Hong Kong dollars. Investors were factoring in the dilution of their holdings and asking where exactly so much money was going. The answer can be found in the results Alibaba released just a few days earlier.
The bill for a single quarter
Alibaba’s capital expenditure jumped 75 percent in the second quarter to nearly 68 billion yuan. In absolute terms, this is the highest among China’s leading technology companies. At the same time, the company’s net profit also fell by three-quarters year on year over the same period, mainly due to investments in artificial intelligence. Free cash flow ended up nearly 45 billion yuan in the red.
This is not a one-off fluctuation. During its financial results presentation, Alibaba acknowledged that it had already spent almost half of its three-year investment plan totaling 380 billion yuan, or approximately $56 billion. The company announced the plan last October, and it was intended to last until 2028. The pace at which the company is spending the money is therefore twice as fast as originally budgeted.
Why spending is rising faster than the company expected
Two factors are driving the increase. The company cited the expansion of computing capacity and rising prices for various chip components as reasons for the surge in capital expenditure. While the first is influenced by management decisions, the second comes from outside and is beyond the company’s control. When the prices of memory modules and accelerators rise, the same amount of hardware costs more than it did last year, rendering a plan based on old prices obsolete.
CEO Eddie Wu also believes that the shortage of computing power will persist over the long term. During a conference call with analysts, he said there was industry-wide consensus that this situation would continue until 2030. He also estimated that the cloud division could recoup these investments within two and a half to three years. Management has shortened this projected payback period because demand for artificial intelligence services continues to rise.
According to Wu, for the company to capture future growth, it must first build the necessary computing capacity. It is therefore purchasing hardware in advance, knowing that the returns will come later.
Cloud is making money, but not enough to save profits
The money is coming back, but more slowly than it is going out. Revenue from cloud and artificial intelligence rose 45 percent to 48.4 billion yuan, while the company’s model services are generating annualized revenue of more than 16 billion yuan. Total revenue for the quarter ending in June grew by 9 percent, driven primarily by cloud and computing services. The rest of the business, however, is not keeping pace. Revenue from advertising and customer management fell by 7 percent, while operating profit declined by 57 percent, partly due to a goodwill impairment and the creation of provisions.
At the same time, the company continues to expand its infrastructure abroad. Last week, the cloud division opened its third data center in South Korea, bringing its network to 104 availability zones across 30 regions. On the day it announced the share placement, it also unveiled Wan3.0, a video generation model that complements its Qwen family of language models. It also recently launched Qwen3.8-Max, one of the world’s largest open-weight models.
Tencent is spending similar amounts and is also in the red
Alibaba is not alone. A comparison with its competitors shows how quickly spending is spreading across the Chinese market. Tencent’s capital expenditure reached a record 52.8 billion yuan in the same quarter, meaning the two companies together invested approximately $18 billion in infrastructure over three months. According to industry estimates, at least 80 percent of this was related to artificial intelligence. Moreover, Tencent’s figure does not include advance payments totaling another 51.4 billion yuan for the purchase of computing power.
The effect is the same as at Alibaba. Due to the scale of this spending, Tencent recorded negative free cash flow of 13.8 billion yuan. Company president Martin Lau defended the spending by saying that he regarded massive investments in artificial intelligence as safe. In his view, the potential returns are high and the risk of losses is minimal because money can be made simply by renting out computing capacity.
Smaller companies cannot keep up with this pace. Quarterly capital expenditure by companies such as Baidu and Kuaishou ranges between 6 billion and 8 billion yuan, just one-tenth of what Alibaba and Tencent are spending. According to some analysts, the artificial intelligence investment race has escalated to a level that most players cannot afford. U.S. technology companies Microsoft, Amazon, Alphabet, and Meta are expected to spend a combined total of about $725 billion on capital investments this year.
Shares remain in high demand
Demand was strong despite the fall in the share price. The order book closed within a few hours, total demand reached $28 billion, and the offering was nearly three times oversubscribed. Almost $6 billion came from sovereign wealth funds and so-called long-only investors, which ultimately received more than 40 percent of the allocation. According to sources, buyers included major sovereign wealth funds from Europe, Asia, and the Middle East.
However, the market’s short-term outlook remains cautious. Charles Wang of Shenzhen Dragon Pacific Capital Management described the offering as negative news for the near term because it dilutes the holdings of existing shareholders. The company’s management responded by purchasing shares in the company. Chairman Joe Tsai bought shares worth approximately 80 million Hong Kong dollars, while Eddie Wu purchased another approximately 40 million Hong Kong dollars’ worth, according to stock exchange filings. During Monday afternoon, the share price remained near 112.80 Hong Kong dollars, only slightly above the price at which the new shares were sold.
Sources: cnbc.com, wsj.com and sedaily.com
