Alibaba's AI Spending Hits Profit, Meta-Microsoft AI Deal

In a packed edition of Bloomberg Tech, host Ed Ludlow delves into the significant financial and strategic moves happening in the artificial intelligence and technology sectors. The show spotlights Alibaba's aggressive pivot into AI, which has resulted in a dramatic profit plunge, and the intriguing new alliance between Meta and Microsoft in the AI space, raising concerns about circular financing.

Alibaba's AI Bet Takes a Financial Toll

Peter Strom, Bloomberg executive editor, joins the program to discuss Alibaba's latest earnings report, which revealed a staggering profit drop of over 75%. This downturn follows the company's decision to increase its quarterly capital expenditures to nearly $10 billion, primarily directed towards AI initiatives, including infrastructure and the development of its AI model, 'Gwen'. Despite a 9% revenue growth, Alibaba's profit took a hit, and its cash flow turned negative by $6.6 billion, a significant figure, particularly within the Chinese market.

Strom notes that while $10 billion might seem substantial, it's relatively modest in the current landscape of AI spending, especially compared to US tech giants. Alibaba is navigating a highly competitive market, facing open-source models like 'Meen Moonshot' and 'Deepseek' domestically. The company's strongest growth area currently lies in cloud computing, serving corporate and government clients. However, its foundational e-commerce business is facing challenges due to a struggling Chinese consumer market, and its fintech arm, Ant Group, no longer provides the same momentum it once did. Despite these headwinds, Alibaba's CEO has declared AI and AGI (Artificial General Intelligence) as the company's 'north star', underscoring a firm commitment to continued heavy investment in the field, even as its stock price shows signs of pressure.

The full discussion can be found on Bloomberg Podcast's YouTube channel.

Meta's AI Spending and Microsoft Partnership

The show also highlights a significant development reported by Bloomberg's Brody Ford: Meta Platforms (NASDAQ:META) has quietly emerged as one of Microsoft's (NASDAQ:MSFT) largest AI customers. Meta is reportedly spending hundreds of millions of dollars annually to access Microsoft's Azure cloud services, consuming trillions of tokens on the platform. This deep integration raises concerns about circular business dealings, where revenue generated from AI usage remains concentrated within a small group of major tech companies. The report suggests that Meta is exploring bringing its AI capabilities in-house by spinning up its own API business, a move that could help cut vendor costs and create new revenue streams. This dynamic illustrates the evolving alliances and competitive pressures shaping the AI era.

Defense Tech Startup Castellian Secures Major Funding

In the defense technology sector, startup Castellian has achieved a significant milestone, raising $1 billion at a $13 billion valuation. The funding round includes $800 million in equity and a $250 million revolving credit facility. Castellian, known for its weapons and defensive systems, plans to use this capital to accelerate the production of its 'Blackbeard' hypersonic missile system. Andrew Kites, co-founder and CFO of Castellian, joined the program to discuss the round, emphasizing the competitive investor interest and the strategic partnerships secured with firms like Andreessen Horowitz and J.P. Morgan, as well as Carlyle. Kites highlighted the company's focus on scaling manufacturing capabilities, noting that "nothing matters until we're manufacturing at scale."

AI market trends and Future Outlook

Martin Norton, Empower chief investment strategist, offers insights into the broader AI market, suggesting that a post-summer 'washout' has cleared some froth, but AI-related volatility is far from over. He notes that while demand for AI remains strong, many stocks may have already priced in future good news. The conversation also touches on the increasing competitiveness of Chinese AI models and the potential for innovation in areas like memory efficiency to address the high costs associated with AI development.

The show concludes by previewing upcoming segments, including an interview with Robinhood CEO Vlad Tenev on prediction markets and an exploration of the growing market for humanoid robots.