In Swimming With the Current, I broke my standing rule against making quarterly predictions, and the results confirm exactly why the rule existed.
Cloud revenue: RMB 41.6 billion actual versus RMB 48 billion predicted. Commerce EBITA: RMB 24 billion actual versus RMB 38 billion predicted. Both metrics breached downside thresholds. By the scale I published in April, RMB 41.6 billion reads “thesis weakened, reassess.” That scale graded the forecast, not the sum-of-the-parts. The analytical error was identical in both: underestimating the base scale of Quick Commerce. As volume surged, absolute cash burn accelerated despite improving unit economics.
AI cloud grew sharply quarter-over-quarter, but legacy cloud was still ~80% of the business entering the quarter, and Chinese New Year seasonality in that legacy base held the blended number below my threshold.
On quick commerce, the miss was bigger and more honest. Unit economics are confirmed improving, but volume grew 57% year-over-year — orders at 2.7× prior year, non-food at 3×. The furnace is running hotter because they are shoving dramatically more volume through it. I was 2–3 quarters too early on the burn taper.
The headline numbers triggered pre-market algorithmic selling. The call itself delivered the most explicit forward guidance of Eddie Wu's tenure. The stock went from -3% pre-market to +7% intraday as humans read the transcript, a 10% swing priced entirely off the gap between the headline and the transcript.
For the first time, Alibaba disclosed AI revenue as a standalone number: RMB 8,971 million ($1.3 billion), representing 30% of external cloud revenue, growing at a triple-digit rate for the eleventh consecutive quarter.
Work the arithmetic backwards. AI revenue was RMB 9.0 billion this quarter, growing at a "triple-digit" rate — by the eleventh consecutive quarter at this scale, likely in the 100–150% range rather than the high end. That brackets the prior-year base and, with it, the rest of the cloud business:
| Component | Q4 FY25 (range) | Q4 FY26 | Growth |
|---|---|---|---|
| AI cloud revenue | RMB 3.6–4.5B | RMB 9.0B | ~100–150% |
| Non-AI cloud revenue | RMB 25.6–26.5B | ~RMB 32.6B | 23–27% |
| Total cloud | RMB 30.1B | RMB 41.6B | +38% |
Non-AI cloud grew somewhere between 23% and 27% — healthy for a competitive Chinese market. AI was simply not yet large enough to pull the blended rate to the 58% prediction.
Every leading indicator for cloud economics outperformed the base-case model.
MaaS margins are higher than IaaS, stated explicitly by Eddie Wu on this call. Cloud EBITA grew 57% on 38% revenue growth, so the margin expansion is already in the reported numbers, and Wu put further improvement "visible in the next 1–2 quarters" — not FY28.
How much higher? In 2024–2025, when AI was a negligible part of AliCloud, public cloud margin ran ~8.0–8.5%. Blended margin is now 9.1%, and with AI at 20% of total cloud revenue that implies AI margins of roughly 11.5–13.5%.
Three factors drive Cloud margins higher over the next twelve to eighteen months, and two are already running. First, AI mix shift: as AI moves from 20% to 50%+ of cloud on Wu's guidance, blended margin rises to roughly 10.5% on composition alone. Second: scale economics and pricing power. Revenue growing 40%+ spreads fixed costs, and the 5–34% price hikes effective April 18 flow straight to margin. Customers are queuing despite the increases. These two factors are sufficient to reach the 12% Post 3 target.
The final driver is T-Head. As domestically fabbed Zhenwu and Yitian chips replace rented foreign compute, the AI component margin has substantial room to expand above the current 11.5–13.5%. Eddie Wu confirmed that T-Head penetration within Alibaba Cloud is "still low" — the constraint is SMIC fab capacity, not product-market fit. If a price war comes, a large wedge of unrealized T-Head cost savings sits under the margin, so Alibaba can absorb pricing pressure far better than the current P&L suggests.
T-Head is going outward first: Alibaba is selling AI servers to partners and co-building data centers rather than absorbing the chips into AliCloud. The inference here is that this is a commercial track record being built ahead of a probable IPO.
Model Studio — the platform business where developers build on Qwen models via API — has crossed RMB 8 billion in annualized recurring revenue. Eddie Wu said crossing RMB 10 billion this quarter is "a certainty." The target for December 2026: RMB 30 billion. That is 3.75× in six months on the highest-margin component of the cloud business.
Token consumption on BaiLian, the domestic-market name for Model Studio, is up 10× since November–December, an acceleration beyond the 6× disclosed last quarter.
Last quarter, Wu introduced a $100 billion five-year Cloud revenue target during Q&A, and the market largely ignored the implied 35% CAGR. Management has now doubled down on it: the CEO has consolidated control over AI and publicly staked his tenure on this specific milestone.
| Component | Post 3 (Apr) | After Transcript |
|---|---|---|
| Assets (net cash, Ant 33%, AIDC, Cainiao, T-Head) | $160B | $160B |
| China Commerce (8× normalized EBITA) | $210B | $210B |
| Cloud Intelligence Group ($85B rev, 12% margin, 25×) | $250B | $250B |
| $100B target scope | Assumed cloud-only | Confirmed cloud-only |
| 12% margin assumption | Aspirational | Supported by 3 engines (2 active) |
| Fair value per ADS | ~$264 | ~$264 ✓ |
| Current price (May 13) | $124 | $145 |
| Upside to fair value | ~113% | ~82% |
The 12% margin that was a five-year aspiration in April is now two to three quarters out, and possibly materially higher over the five-year horizon. The CAPEX plan that seemed aggressive will be exceeded because they are supply-constrained across every procurement channel.
Customer Management Revenue (CMR) grew +1% on the headline because a new merchant development program moved platform subsidies out of sales and marketing expense and into contra revenue. Like-for-like, CMR grew 8%. Group revenue like-for-like was +11%. 88VIP membership hit 62 million and is still growing double digits. The underlying commerce business is fine.
On Quick Commerce specifically: Jiang Fan confirmed unit economics breakeven by end of FY2027 — roughly 2–3 quarters later than our optimistic scenario, but years ahead of the original FY2029 guidance. He said April onwards showed "significant" unit economics improvement while maintaining volume. The burn has an expiration date — and when it arrives, the consolidated P&L will snap back in free cash flow at precisely the moment cloud margins are hitting their highest levels.
Predicting quarterly revenue conversion from token volume is not where this framework has edge. Three falsifiable milestones for the next two earnings reports:
Milestone 1: Model Studio ARR ≥ RMB 10 billion by the August report (Q1 FY27). If yes, the MaaS thesis is confirmed and the highest-margin component is scaling as guided.
Milestone 2: Cloud external growth ≥ 45% in Q1 FY27. The seasonal rebound plus price hikes plus Model Studio surge should deliver this. If it doesn't, the acceleration thesis needs reassessment.
Milestone 3: Cloud EBITA margin ≥ 10% in Q1 or Q2 FY27. Eddie Wu promised visible margin improvement in 1–2 quarters. We will hold him to it.
All three confirmed: the Post 3 base case is conservative. Any one fails: reassess, against a $94 entry and a ~$264 fair value.
The consolidated headline was terrible: EBITA -84%, non-GAAP net income essentially zero, free cash flow negative. The algorithms sold pre-market. Then the humans read the transcript and bought it back 10%.
The demand underneath is not the American kind. China skipped the SaaS revolution: millions of enterprises never had a cloud vendor, and the government is pushing an AI-native industrial base. Alibaba is not fighting to displace entrenched incumbents. It is filling a vacuum — with a physically sold-out product, accelerating growth, pricing power, and a margin structure that is temporarily suppressed by the most expensive possible way of serving current demand.
The Post 3 model survives intact: the $100 billion target confirmed as pure cloud, the $85 billion estimate standing, and the 12% margin moved from aspiration to a path with two of three engines already running. And the three milestones above will tell us, within two earnings cycles, whether the thesis is tracking or not.
The market still prices Alibaba as an ex-growth utility while margin expansion and growth acceleration are both in the reported numbers.
Get the next post by email. No spam.
The author holds shares of Alibaba (BABA) at a blended cost basis of approximately $94.
Nothing in this letter is investment advice. Original predictions from April 2026. Scorecard graded May 13, 2026.
Disclosure: Positions are disclosed live at disclosure.plainsightresearch.com.
A $295B megacap trading at 40–45% of fair value. Cloud growing 36%. AI revenue in its tenth consecutive triple-digit quarter. The algorithm reads collapse; it's actually a pivot.
Sinopec dated the gasoline peak to 2023; the actuals ran faster. The demand did not vanish — it changed meters. Five migrations carry electrification from 30% toward 60%.