Why Alibaba Rallied Today

Key Points

• Alibaba said it was looking to raise $3.2 billion in convertible notes.

• It also said a majority of that spending would go toward its data center efforts.

• Despite better-than-expected top-line growth, Alibaba was cash flow negative last quarter as it joins the race to build artificial intelligence (AI).

• 10 stocks we like better than Alibaba Group ›

Shares of Chinese tech giant Alibaba (NYSE: BABA) rallied on Thursday, closing the day up 8%.

Alibaba has risen this year on the back of artificial intelligence (AI) enthusiasm, with a few positive recent announcements. Today, the company raised more money to put behind these efforts, with investors giving the increased spending a thumbs-up.

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Alibaba raises $3.2 billion

Today, Alibaba said in a filing that it was seeking to raise $3.2 billion in the form of a convertible bond. Alibaba noted it would use about 80% of the capital raise to strengthen its data center build-out, with the remaining 20% going to its international commerce efforts.

Usually, when a company raises money, it's a negative, and the stock goes down. However, investors are currently giddy at the prospect of artificial intelligence and the growth it will bring in the future. So, the fact that Alibaba is encouraged to invest even more in that space could be leading investors to think the company sees a big opportunity.

After all, Alibaba's cloud computing unit grew 26% last quarter, accelerating its growth rate well above the company average. And the international commerce business grew 19%, also above the company average. Last week, Alibaba unveiled its newest large language model, the Kwen 3-Pro, which uses 1 trillion parameters, which also received a positive reaction.

So, the fact that Alibaba is raising money to put behind these business could mean it sees an even bigger growth opportunity ahead.

Image source: Getty Images.

Cash flow turned negative

At first, it's a bit strange that Alibaba is raising money to foster its data center build-out, given that it has over $50 billion in cash on its balance sheet. However, despite revenue growth figures that beat expectations last quarter, Alibaba's free cash flow actually turned negative, to $2.6 billion in June.

Like other tech giants, the company is embarking on a massive investment cycle for AI computing that it hopes will yield benefits in the future. However, the payoff is still uncertain, so there are still risks here for Alibaba and others. Nevertheless, investors appear to be coming around to the thinking that AI is the future, so this type of elevated spending is currently being rewarded.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.