After a challenging four years, Alibaba (BABA, Financial) has surged nearly 60% in 2025, driven by optimism around its AI and cloud computing growth. However, the stock is cooling off after BABA announced plans to invest at least RMB 380 billion in AI and cloud computing over the next three years.

Alphabet (GOOG, Financial) experienced a similar reaction following its mixed Q4 2024 earnings report on February 4, where its FY25 capex guidance of $75 billion worried investors.

• Investors are scrutinizing companies' substantial AI spending as they question potential returns. Concerns heightened on January 20 with the release of DeepSeek-R1, a Chinese AI model developed at a fraction of OpenAI's ChatGPT cost.
• BABA's investments are starting to pay off, with total revenue growth accelerating to 7.6% in Q3 from 5.2% in Q2, driven by a 13% increase in its Cloud Intelligence Group, marking the fastest growth in three years.
• AI-related products, including BABA's Qwen-VL, have achieved triple-digit year-over-year growth for six consecutive quarters. BABA plans to launch a new AI model based on its Qwen 2.5 LLM soon.
• Although BABA didn't specify capex in its Q3 earnings report, net cash used in investing activities rose 247% year-over-year to RMB 145.9 billion for the nine months ending December 31, 2024.

The key takeaway is that BABA's aggressive FY25 spending plans are causing anxiety about potential impacts on its bottom line, which could offset the momentum gained. With the stock's significant rise in early 2025, a pullback was expected, prompting some investors to take profits.