Alibaba's (BABA -2.96%) stock has been on fire lately. The Chinese tech giant reported a commendable result for the quarter ended Dec. 31, 2024, with revenue growing by 8% and income from operations surging by 83%.

Investors cheered the results, sending the stock up by around 15% after the announcement. But digging further into Alibaba's results indicates much more than the headline numbers, suggesting that Alibaba's turnaround effort is finally bearing fruit.

Image source: Getty Images.

Alibaba was facing a series of challenges

The last few years have been the most challenging period for Alibaba. It has experienced a series of issues, which included the cancellation of Ant Group's initial public offering, regulatory crackdowns on the tech sector in China, and a challenging operating environment post-COVID-19 lockdowns.

These challenges affected its financial performance, leading to muted/negative growth in its flagship e-commerce and cloud computing businesses. To put it into perspective, e-commerce and cloud computing revenue grew at 34% and 62%, respectively, for its fiscal 2020, which ended March 31, 2020. However, in fiscal 2024, revenue rose by just 5% and 3%, respectively.

Investors were concerned that the tech giant had passed its prime, and slow to no growth could be the new normal for it. It didn't help that the company made one of its biggest restructurings during this period, which resulted in a complete overhaul of the senior leadership team. The change in management team added another layer of uncertainty to the dire situation.

The e-commerce business has been making good progress lately

Once the undisputed leader in the Chinese e-commerce sector, Alibaba's dominance is now in question as it faces competition from younger rivals like Pinduoduo and Douying. The former targets cost-conscious consumers, while the latter attracts live-streaming shoppers.

In response, Alibaba has made some bold moves, including shifting its focus from merchant-centered to consumer-centered, improving price competitiveness, and doubling down on artificial intelligence (AI) to improve user experience. In particular, Alibaba's focus is on enabling customers of different levels of spending power to find the best products at affordable prices on its platforms.

While it's still in its early days, Alibaba's latest financials demonstrate that its strategy is paying off. For instance, the e-commerce company's customer management revenue grew by 9% in the quarter ended Dec. 31, 2024, driven by growth in gross merchandise value (GMV) and take-rate. This demonstrates that consumers are spending more on Alibaba's e-commerce platforms, and merchants are spending more on marketing fees.

Beyond its home turf, Alibaba is expanding its international e-commerce businesses to diversify away from its reliance on its home market. This segment has been growing rapidly lately, with revenue up by 32% year over year in the latest quarter. In other words, Alibaba is making solid strides in rejuvenating the growth of its e-commerce businesses.

The cloud computing business is growing again

As the undisputed leader in China's cloud computing industry with a 39% market share, Alibaba Cloud once held the biggest responsibility in sustaining Alibaba's high growth trajectory. However, a few years of slow growth almost shattered investors' hopes altogether. Weak enterprise demand due to challenging economic conditions, competition, and the cancellation of Alibaba Cloud's IPO spin-off are some of the issues that the business has faced.

Fortunately, with the new CEO at the helm, Alibaba Cloud is gradually gaining momentum, evident in its accelerating revenue growth rate of 13% year over year in the latest quarter. In particular, AI-related revenue grew at triple-digit rates for six consecutive quarters. It also launched its latest large language model, Qwen 2.5, which is among the most advanced models globally.

Alibaba Cloud's recent performance indicates a few things. First, the cloud computing business is gaining momentum, and its growth rates could improve further in the coming quarters. Second, the new leadership team has made some great decisions, such as going all-in into AI, setting the business in the right direction for the future.

Besides, Alibaba Cloud is doubling down on investment in AI infrastructure, with expected investments in the next three years to exceed what it has spent over the past decade. It will also invest heavily in developing AI foundation models and AI-native applications. These moves suggest that cloud computing could have a multi-year growth cycle ahead.

What it means for investors

Alibaba's recent quarterly report is a breath of fresh air, suggesting that the tech giant has finally found its new direction. Investors should monitor Alibaba's performance in the coming quarters. If the e-commerce and cloud computing businesses can sustain their recent trajectory, investors can be confident that the worst could be over for Alibaba.

All eyes are on the company's performance in the next few quarters.