Alibaba's AI Spending Spree, Concerns of Circular AI Financing

**SPEAKER_1** (0:05)
Bloomberg Tech is live from the heart of Silicon Valley with Ed Ludlow in San Francisco.

**Ed Ludlow** (0:14)
This is Bloomberg Tech coming up. Alibaba's profit plunges more than 75 percent after the company increased its quarterly capex to almost $10 billion for AI. Plus, Meta has quietly become one of Microsoft's largest AI customers, reviving concerns of circular financing. We're going to have the details. And Defense Tech startup Castelion hits a $13 billion valuation. We're going to discuss how the company plans to use its latest funding to boost production of its hypersonic missile systems.
Technology people, there is a lot going on in financial markets. In summary, technology stocks are down for a fifth straight session. That is something that we saw happen throughout July. We see the 30-year yield also kind of move back higher, going back to where it was prior to the news of yesterday. If you remember, we started the show with the Treasury's intervention in buying back longer dated debt. That has had a ripple effect across asset classes. By the way, oil also pushing higher, $93 a barrel on Brent Crude as the president continues to talk about the war in and with Iran. Elsewhere, the technology stories are earnings related largely. Walmart has had its slowest US growth in six years, despite being increasingly focused on e-commerce, more online, pushing basically richer, higher net worth individual customers towards convenience. And it hasn't really panned out for them. We'll get a little more, the stock's down almost 10%.
Alibaba committed to AI but profits taking it here. And it's with Alibaba we want to focus. Let's get to Bloomberg Executive Editor, Peter Elstrum. I find this so interesting because Alibaba is highly analogous with what we see with some of the biggest technology companies here in the United States. But $10 billion doesn't seem that big a commitment to me.

**Peter Elstrom** (2:04)
Not by today's scales of AI spending, that's certainly right.
Yeah, Alibaba has had a rough go of it this quarter, and for a few quarters now, the e-commerce company has pivoted aggressively into AI. They've invested a lot in infrastructure, and also in their AI model, Gwenn, which has been quite popular. We talked a couple of weeks ago about the new version of Gwenn that's getting lots of attention. But when you look at the financials, they've been pretty rough for the company. Revenue did grow about 9%, but as you say, profit was down 75%, and their cash flow turned negative to the tune of $6.6 billion. Again, maybe that's not a lot of money by US capital spending figures, but it is in China. The company is trying to invest in a number of these different areas, and the payoff is quite difficult for them. They are right in the heart of all these open source models that we've been talking about, including Moonshot and DeepSeek. They have to compete with those guys within the domestic market, and that's been very difficult for them when it comes to profitability.

**Ed Ludlow** (3:02)
So Alibaba is kind of like Amazon, in the sense it has multifaceted business, the e-commerce business, AI, cloud computing, other fintech and social media ventures. What do we learn about the fastest growth? Where are they doing best?

**Peter Elstrom** (3:16)
Well, they're doing the best in cloud computing right now. That has been a strong growth business for them. It is coming on strong. They do sell capacity to corporate customers and government customers that are in particular. The Chinese consumer is struggling a bit at this point. So that foundational e-commerce business has been a challenge for Alibaba. That's been the case for a while. They used to have, of course, more control over ANTH, the financial services arm. They still have a stake in it, a financial stake in that company. But that is not the kind of momentum builder that they had had in the past. And really, Eddie Wu, the CEO, he was talking on the conference call afterwards, talking about how AI is really their North Star. They've talked about AGI is really the goal for the company now. That's what he wants to make a priority for them. So they're investing very, very heavily. They're very convicted in their commitment to AI. But it was one of those conference calls as we were listening in, where the stock ticks down a little bit as the minutes go by. It's not exactly what we want to see at this point. They're certainly going to continue to invest in that field, but the payoff from AI from them right now doesn't look that great.

**Ed Ludlow** (4:25)
Bloomberg's Peter Elstrom, who leads our coverage of Asian technology companies. Thank you very much. Our next guest believes that an AI resurrection is going to come following a summer washout, though AI-related volatility is far from over. And a repeat of returns from the first half of the year is unlikely. Empowered Chief Investment Strategist, Martin Norton, joins us now. It's interesting, you can separate the first six months of this year with what many think will happen in the back six months.