BABA Delivers Strong AI Results as Robotics Sector Gains Momentum

**SPEAKER_1** (0:00)
I do want to bring Sam back into the conversation, though, turn our attention to this week's China Tech Earnings with Henry Greene, Senior Investment Strategist at KraneShares. Henry, thanks for being with us. Now, I was talking to Jenny Horan just a bit ago about Alibaba and the reaction that we've seen so far to these earnings. Initially, we saw a sell-off, even though revenue beat expectations, we saw their cloud revenue jump 45%.
But now we've moved back into positive territory. Is the market questioning here? The AI opportunity and just how expensive it is? Is that what's driving this interesting digestion?

**Henry Greene** (0:36)
Yeah. Hi. Thanks for having me. Yes, I think so. I think there's a lot of mixed messages coming out of these earnings.
On the one hand, they did miss expectations on earnings per share, so that's on their bottom line. They missed expectations, but their EBITDA was actually outside of it, was exceeding expectations. That's when you look at their actual operating profit, was actually pretty strong and stronger than it's been in previous quarters. Yeah, this is their ninth consecutive quarter of double-digit AI and Cloud growth.
That's really, really strong for this company. They're clearly a leader in AI, continue to be a leader in AI in China. I think what's really positive and maybe the market is now noticing this, compared to other names in our KWeb China Internet portfolio, KWEB, that's the we like to think of as the benchmark for the China Internet space. When you look at other players in that portfolio like Tencent, Alibaba's come a long way in their current CapEx cycle. That's mostly AI compute CapEx. They're about halfway through a three-year cycle where they've spent about 150 RMB on AI CapEx and they have about 150, a little less than that to go. So they're coming off of, we think their CapEx cycle has already peaked. Whereas for Tencent, for example, it's just now ramping up, so they're going to see more quarters of lower profitability. Whereas we think the profitability story for Alibaba going into next quarter and the quarter after that is really, really strong because they're coming off of this CapEx cycle.

**Sam** (2:12)
What is it about the CapEx and the spending indigestion we've seen in this name? Because you raise a really interesting point. I mean, Tencent is directing a lot of its spending and its investment in AI to very different parts of the business to say what Alibaba is focused on, and that is obviously the compute. So if we're starting to see the monetization by the way of the cloud revenue and some of the AI product revenue, I mean, what more is the street looking for from Alibaba right now? And when do you believe, which quarter, Henry, does that start to show up?

**Henry Greene** (2:46)
So Sam, I think that the street is pretty positive, views pretty positively the AI developments for Alibaba. I think they've done very well in execution on AI and cloud, and we're seeing improving monetization. So I think there's more upside there than the street thinks. I think really what the street is also asking, what the market's asking is about, again, e-commerce is still their core business, right? And it's still challenged, there are macro challenges, macro factors within China.
And that's been somewhat challenged. So I think we just need a little bit of a push there. And I think that we're seeing more indications that there could be some consumption stimulus coming from the government in China. So that could be positive because again, e-commerce is still a large part of their business, right? When you look at the Mag 7 in the US, you look at Amazon and Google, right?
You see AI growth and then you also see relatively stable growth for the overall business, including commerce. There's just a little bit of a macro challenge still in China now, but the AI story is very, very strong. And we do see some upside, I think, in the market's opinion of that AI story. And you mentioned monetization. Yeah, we're actually looking at the consensus is being that Alibaba will be able to raise token prices on its models. A lot of its models are open source, but they still charge for that compute. Management has indicated and we believe that they'll be able to raise token prices significantly so you will see more monetization of that AI spending. But certainly if we get a consumption stimulus in China, which we may get this year, that would be very positive as well for the company.

**SPEAKER_1** (4:32)
Henry, I want to talk about Baidu too because their earnings report and setup looks a bit more challenging than BABA's did. The revenue was down 4 percent, EPS was down 72 percent, online marketing revenue was down. How are you looking at Baidu and its results? Is this also an AI investment story or are we seeing perhaps more fundamental deterioration of the legacy business here at Baidu?