(Yicai) Nov. 26 -- Alibaba Group Holding’s profit halved in its fiscal second quarter, pulled down by the Chinese e-commerce giant’s big investments in artificial intelligence and consumer subsidies.

Net profit fell 53 percent to CNY20.6 billion (USD2.9 billion) in the three months ended Sept. 30 from a year ago, the firm’s earnings report showed yesterday. Revenue rose 5 percent to CNY247.8 billion (USD34.8 billion), beating market expectations for CNY245.2 billion. Factoring out Sun Art and Intime, retail businesses Alibaba sold, like-for-like revenue would have risen 15 percent.

“We have entered into an investment phase to build long-term strategic value in AI technologies and infrastructure and a consumption platform integrating daily life services and e-commerce,” said Chief Executive Eddie Wu. “With our significant strategic investments in these areas, our two core businesses of AI + Cloud and consumption continued to deliver strong growth this quarter.”

The Hangzhou-based company has committed heavily to AI and instant retail this year, unveiling a three-year CNY380 billion (USD53.7 billion) plan in February to expand AI and cloud infrastructure -- more than its total outlay on technology over the past decade -- while launching Taobao Flash Buy in April and allocating CNY50 billion (USD7 billion) to consumer subsidies in July with the aim of countering rivals Meituan and JD.Com.

Alibaba will pursue separate playbooks for these two high investment areas, management said on the firm’s earnings conference call. It plans to accelerate and even expand outlays on AI, while focusing more on efficiency and appropriately reducing investment in instant retail.

Chief Financial Officer of Alibaba Toby Xu said Alibaba had deployed about CNY120 billion in capital expenditure toward AI and cloud infrastructure over the past four quarters.

“We don't think there will be a so-called 'AI bubble' in the next three years,” Wu noted, adding that the firm’s CNY380 billion investment plan now seems a bit conservative.

Income from operations plunged 85 percent to CNY5.4 billion (USD754 million) in the quarter, which Alibaba attributed to ramped-up investments in instant retail, user experience initiatives, and technology, which was partly offset by double-digit growth in e-commerce revenue and the improved operating results supported by continued growth in cloud business.

Alibaba's shares [HKG: 9988] closed 1.9 percent lower at HKD154.80 (USD19.90) each in Hong Kong today, after opening 2.8 percent down. In New York, the company's stock [NYSE: BABA] fell 2.3 percent to USD157.01 yesterday.

Robust AI demand further speeded growth of the company’s cloud intelligence group, where revenue jumped 34 percent to CNY39.8 billion, primarily driven by public cloud income growth, including the increasing adoption of AI-related products.

Wu said the global AI build-out is straining supply across the industry chain, from semiconductor manufacturing to memory and central processing units, and that this AI demand-driven expansion cycle is likely to persist for at least two to three years, keeping AI resources in short supply.

Quarterly revenue from Alibaba’s instant retail business surged 60 percent to CNY22.9 billion, mainly thanks to growth in orders after the launch of Taobao Flash Buy.

Alibaba is working to narrow Taobao Flash Buy's losses. In October, the per-order loss halved from July and August, helped by a better mix of orders and logistics savings from scale, said Jiang Fan, CEO of Alibaba’s China e-commerce group.

This quarter will see investment in Taobao Flash Buy peak, as its operational efficiency improves and scale stabilizes, Xu said, adding that investment in this business will shrink significantly next quarter.

Editors: Dou Shicong, Futura Costaglione