The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Robyn Mak

HONG KONG, May 14 (Reuters Breakingviews) - Investors trying to gauge Alibaba's 9988.HK returns on its artificial intelligence investments have a new headache: confusing disclosures. The $350 billion Chinese e-commerce giant on Wednesday reported surging sales and improving margins at its most-watched cloud computing and AI unit. Yet the company's model training and chatbot costs sit elsewhere. That paints an overly flattering picture of Alibaba's AI business.

The company swung to a rare operating loss of 848 million yuan ($125 million) in the three months to end-March, as boss Eddie Wu ramps up spending to hit his target of $100 billion AI revenue annually in five years. A blistering 38% year-on-year surge in sales at its Cloud Intelligence Group, to $6 billion in the quarter, is promising. Even better, adjusted earnings before interest, tax and amortization—Alibaba's preferred profit metric—increased 57% over the same period; executives have guided EBITA margins for that unit to be in the teens in the next one to two quarters, up from the current 9%. By 2031, Alibaba's cloud arm will account for 44% of group revenue, per analyst forecasts on Visible Alpha, from less than a fifth today, eclipsing its domestic e-commerce business.

Given the rising importance of the company's AI operations, the disclosures are less than ideal. Alibaba puts its model training costs in an "All Others" segment, which includes a mishmash of businesses ranging from logistics to mapping to video games to supermarkets and more. EBITA losses in that category rocketed 520% in the recent quarter to more than $3 billion, primarily due to "increased investment in technology businesses". Lavish marketing spending on the company's flagship Qwen chatbot is probably to blame, but the reporting makes it hard to see to what extent. This matters as the costs associated with training models are one of the biggest drags on profitability for AI labs. Analysts of CLSA reckon Alibaba's "All Others" losses will likely widen year-on-year mostly due to model training.

Alibaba's Hong Kong shares were up 5% following the earnings. Investors are starting to see a path to AI returns. But the risk is that those metrics are becoming harder to read.

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CONTEXT NEWS

China's Alibaba on May 13 reported revenue of 243.4 billion yuan ($35.8 billion) in the three months to March 31, an increase of 3% year-on-year. The company made an operating loss of 848 million yuan, compared to an operating profit of 28.5 billion yuan a year earlier.