Alibaba Group Holding Ltd., the leading online retailer in China, reported a meager 4% increase in revenue, as its Chinese commerce business experienced a decline for the first time in at least a year. This development reflects the economic challenges facing the world's second-largest economy and casts doubt on a quick turnaround for the company that pioneered Chinese e-commerce two decades ago. The company's profit also plummeted by 27%, dashing hopes for immediate recovery.

The decline in Alibaba's Chinese commerce business has prompted Chief Executive Officer Eddie Wu to spearhead an overhaul of the conglomerate. Since the crackdown on big tech companies in 2020, Alibaba has struggled to consistently deliver growth and innovation. Wu, who took over the helm about a year ago, has focused on enhancing the company's commerce and cloud computing businesses, while also making strategic bets on AI technology for the long term.

Investors express concerns that Alibaba's aggressive market share recapture efforts from competitors like PDD Holdings Inc. and JD.com in China could compress margins. The company's operating margin fell to 15% in the most recent quarter, down from 18% a year earlier. In the past three years, Alibaba has posted losses or declines in net income for the majority of its quarterly results.

Chinese economic uncertainty further exacerbates Alibaba's challenges. Recent data showed that China's economy failed to rebound after the worst quarterly performance in five years, as domestic demand weakened due to a prolonged housing downturn. Tencent Holdings Ltd., a major competitor, also faced flagging consumption, which affected its fintech and cloud division.

Alibaba reported revenue of 243.2 billion yuan ($34 billion) in the June quarter, falling short of the average projection of about 249.9 billion yuan. Surprisingly, revenue from its core platforms, Taobao and Tmall, dropped by 1%. Net income also saw a decline of 27%, attributed to the high cost of attracting and retaining shoppers. However, adjusted earnings surpassed expectations.

In contrast, smaller rival JD.com Inc. reported results that exceeded expectations, although sales only increased by 1.2%. The fierce competition between the three major players in China's e-commerce market, Alibaba, PDD, and JD, intensified during the annual "618" shopping festival, with deep discounts and celebrity endorsements used to boost sales.

Alibaba's international division remains one of its fastest-growing businesses, with a growth rate of 32% in the quarter. However, analysts predict continued losses in that division. To counter the market gloom, Alibaba has increased its share repurchases, adding $25 billion to its already record buyback program.

Despite the challenges, Alibaba remains committed to profitability and reassured investors that it is a top priority. Executives aim to make most of Alibaba's units break even within one to two years. However, industry analysts caution that the road to recovery might be longer than anticipated, especially as competition remains fierce and Alibaba navigates the complexities of a rapidly changing economic landscape.

Looking ahead, Alibaba is aggressively cutting prices in its cloud computing division to compete with state-backed rivals. While revenue from cloud services grew by approximately 6% in the most recent quarter, analysts question the sustainability of this growth given rising corporate uncertainty and ongoing price wars in China's cloud and AI sectors.

Alibaba's focus on AI products could potentially drive growth in its cloud business, as there is a growing demand for AI training and inferencing. The company has also invested in numerous generative AI startups, engaging in a costly battle with its main competitor, Tencent. Despite the economic risks in China, the demand for AI technology integration from corporations remains robust, leading executives to project a return to double-digit growth in cloud revenue from external clients later this year.

As Alibaba continues to face headwinds in the Chinese market, its efforts to revitalize its core businesses and tap into emerging sectors like cloud computing and AI will be vital for sustained growth and to regain investor confidence.