Alibaba's Strategic Bet on Food Delivery and AI: Is This the Next Big Catalyst?

Alibaba Group's 2025 Q2 financial report paints a paradox: a company grappling with short-term margin pressures while simultaneously laying the groundwork for a transformative AI-driven ecosystem. At the heart of this duality lies a strategic bet on food delivery and artificial intelligence, two sectors that could either redefine Alibaba's trajectory or strain its resources. For investors, the critical question is whether these investments will generate sustainable returns or amplify near-term volatility.

Short-Term Squeeze: Food Delivery's Costly Game

Alibaba's Ele.me unit remains a battleground for market dominance in China's hyper-competitive food delivery sector. In Q2 2025, the company reportedly spent over 10 billion yuan to defend its share against JD.com, a move that slashed projected EBITDA from 55 billion yuan to 45 billion yuan. This aggressive discounting strategy—akin to a race to the bottom—has yet to yield meaningful revenue gains. Variable costs remain stubbornly high, and breakeven thresholds for scale are elusive.

The third quarter, a peak season for on-demand services, is expected to see these pressures intensify. Mizuho analysts note that Ele.me's user acquisition costs are rising faster than its revenue per user, a red flag for margin sustainability. While food delivery is a high-growth sector, Alibaba's approach risks mirroring Uber Eats' early struggles in the West, where profitability took years to materialize.

AI as the Long-Term Lifeline: Building an Ecosystem

Amid these challenges, Alibaba's AI investments offer a counterpoint. Through its cloud arm, Alibaba Cloud, the company has deployed the Qwen large language model (LLM) across 290,000 enterprise customers, spanning robotics, healthcare, and automotive sectors. The Model Studio platform, powered by the Model Context Protocol (MCP), enables seamless integration of AI models with real-world data, reducing deployment costs by up to 70% for clients like Dingdong and RayNeo.

Notable use cases include:
- NIO's NOMI AI assistant, enhanced with Qwen for natural language interactions in smart vehicles.
- Youlu Robotics' cleaning bots, now capable of real-time decision-making via Qwen.
- Microcraft's healthcare systems, leveraging AI for automated report generation and patient communication.

These integrations are not just incremental upgrades—they signal a shift toward industry-specific AI solutions, a space projected to grow at 35% annually through 2030. Alibaba Cloud's $53 billion three-year investment pledge underscores its ambition to dominate this market, with 87 availability zones across 29 regions supporting global expansion.

Balancing the Books: A Calculus of Risk and Reward

The tension between short-term losses and long-term gains is acute. Alibaba's AI infrastructure, while a growth engine, comes with high depreciation costs. Bernstein analysts caution that these expenses could weigh on near-term profitability, a risk amplified by the food delivery segment's drag. However, Morgan Stanley and Barclays argue that Alibaba's $53 billion cash reserves and first-mover advantage in AI infrastructure position it to weather these pressures.

For context, consider Amazon's AWS: it took over a decade to achieve profitability, yet it became a 150 billion-dollar business. Alibaba's AI cloud services, now generating $2.3 billion annually, could follow a similar trajectory—if the company can scale efficiently.

Investment Implications: A Call for Patience

Alibaba's stock (BABA) has underperformed broader tech indices in 2025, trading at a 15% discount to its 2024 peak. This reflects investor skepticism about its near-term margins, yet the company's AI-driven ecosystem integration offers a compelling long-term thesis.

Key risks:
- Continued margin compression in food delivery.
- Slower-than-expected AI adoption in key industries.
- Regulatory scrutiny of its market dominance.

Upside catalysts:
- Breakthroughs in AI-driven enterprise solutions (e.g., smart cockpits, healthcare automation).
- Cross-selling between Alibaba Cloud and e-commerce platforms.
- Global expansion of Qwen's ecosystem.

For investors with a 3–5 year horizon, Alibaba presents a high-conviction opportunity. However, those wary of short-term volatility might prefer a hedged approach, pairing exposure with more stable AI-focused stocks like NVIDIA (NVDA) or Microsoft (MSFT).

Conclusion: A High-Stakes Gamble

Alibaba's dual strategy—defending its food delivery empire while building an AI-centric future—is a high-stakes gamble. The company's ability to balance these priorities will determine whether it emerges as a leader in the AI-driven economy or becomes a cautionary tale of overreach. For now, the data suggests resilience: despite Q2 setbacks, Alibaba's ecosystem integration is accelerating, and its AI investments are already generating tangible value.

The next catalyst? Q3 results, due in October 2025. If Alibaba can demonstrate that its AI-driven margins are improving while food delivery costs stabilize, the market may finally start to reward its vision. Until then, patience—and a clear-eyed view of both risks and rewards—will be essential.