Thinking of Buying Alibaba Stock Now? Here's 1 Green Flag and 1 Red Flag.

For years, investors knew the company primarily as China's e-commerce giant, with Taobao and Tmall at the center of its business. But Alibaba is now pouring billions of dollars into artificial intelligence (AI), building cloud infrastructure, developing its own AI models, and even investing in AI chips.

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The transformation is starting to show up in the numbers.

In its fiscal 2027 first quarter, which ended June 30, Alibaba's AI cloud and compute services revenue jumped 45% year over year to 48.4 billion yuan (about $7.2 billion). But there's a catch: Capital spending surged 75% to 67.7 billion yuan ($10.1 billion), pushing free cash flow into negative territory.

So, is Alibaba a buy now? Investors should focus on one major green flag and one red flag.

Green flag: AI is becoming a real business

For years, Alibaba's AI ambitions were mostly a promise.

The company had Qwen, its family of large language models . It had Alibaba Cloud. And it had ambitious plans to invest heavily in AI infrastructure. But investors still needed proof that businesses would actually pay for these services.

That proof is beginning to emerge. Alibaba's AI cloud and compute services revenue grew 45% year over year in the latest quarter. That's impressive growth for a business already generating billions of dollars in quarterly revenue. Even more encouraging, adjusted earnings before interest, taxes, and amortization (EBITA) for the segment jumped 133%.

In simple terms, Alibaba isn't just getting more customers to use its AI services. It's also starting to make more money from the AI business as it grows.

That's important because cloud computing can become more profitable as infrastructure gets used more efficiently. Once the expensive data centers and computing systems are in place, additional revenue can flow through at higher margins -- an effect enabled by operating leverage .

Alibaba is also building an ecosystem around Qwen, its AI model family. Developers can use Qwen to build their own applications, while Alibaba provides the computing power and software tools needed to run them.

Think of it this way: Qwen attracts developers. Alibaba AI Cloud provides the infrastructure. If that flywheel continues to work, Alibaba could build a much larger and more valuable cloud business over time.