Alibaba's New AI Chip Fired Up the Stock — But Can the Rally Survive a $126 Billion Spending Hangover?

Shares shifted sharply as Alibaba extended a two-day selloff, trading at $126.27 in Thursday pre-market — down roughly 8% from Monday's close of $135.64. The drop came with no fresh negative headline; instead, it marks a classic case of investors cashing in gains after an early-May rally fueled by Alibaba's new homegrown AI processor and a wave of analyst upgrades.

  • The Chip Is Real, But the Hype Ran Ahead of Revenue. Alibaba's new AI processor delivers three times the performance of its predecessor , and the company says it has already shipped 560,000 units to more than 400 customers across 20 industries. That is a credible traction story. But several details remain undisclosed, including per-chip pricing, shipment volumes to outside customers, and the timeline for taking its chip division public. Without those numbers, investors have no way to model how much revenue the chip actually adds — which is exactly why short-term traders booked profits.

  • A Useful Chinese Chip, Not an Nvidia Killer. Analysts are clear-eyed: "M890 is a small but real contribution to China's AI self-sufficiency… it is not a true competitor to H200. But… in the China market, it is a believable replacement," said Counterpoint's Brady Wang. That matters because the chip launch is part of a broader push to build homegrown alternatives to U.S.-sourced AI chips, driven by Washington's export restrictions. For shareholders, the chip reduces Alibaba's dependence on foreign hardware — a defensive win — but does not yet threaten Nvidia's pricing power globally.

  • The AI Spending Bill Is Enormous — and Still Growing. Capital expenditure surged 80% year over year to RMB 31.9 billion ($4.5 billion) last quarter, dragging free cash flow into negative territory.

The consensus estimate for fiscal 2026 earnings is $5.26 per share, implying a steep 41.6% year-over-year decline. CEO Eddie Wu has signaled spending may exceed the original three-year plan of roughly $56 billion. Cloud revenue rose 34% to RMB 158 billion in fiscal 2026, driven by AI product adoption — but that growth has not yet offset the profit squeeze.

  • Wall Street Says Buy the Dip — With Patience. All 41 covering analysts rate BABA a "Strong Buy," with an average 12-month target of $191.08 — roughly 48% above today's price. The gap reflects a belief that current earnings understate Alibaba's long-term power. But with the stock already at a low-20s price-to-earnings ratio after a 70%-plus 2025 rally, any disappointment in cloud growth or profit margins could trigger fresh selling.