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Market Data Table

Breakfast News: Alibaba's AI Push Comes at a Cost

August 20, 2026

Wednesday's Markets
S&P 500 7,708 (+0.21%)
Nasdaq 26,331 (+0.16%)
Dow 53,463 (+0.22%)
Bitcoin $68,688 (+6.36%)

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1) Alibaba's Profit Sinks on Cloud Bet

Chart showing Alibaba's net income over the past three years, falling from $28 billion in Q3 2023 to $3 billion in Q1 2024, jumping back up to $24 billion in Q2 2024, $44 billion in Q3, and $49 billion in Q4, then plummeting to $13 billion in Q1 2025, jumping back to $41 billon in Q2, falling back to $21 billion in Q3, $16 billion in Q4, and back up to $26 billion in Q1 2026.

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Alibaba (NYSE:BABA), China's biggest e-commerce and cloud computing company, fell around 4% ahead of the market open after fiscal first-quarter revenue rose 9% year over year to $39.6 billion. Operating income collapsed 57% to $2.2 billion, and net income fell 75%, hit by heavier tech investment, a goodwill impairment, and a legal provision. Free cash flow swung to an outflow of $6.6 billion, as Alibaba Cloud's build-out outspent what the business generates.

E-commerce still has to fund the build-out: Customer management revenue fell 7% overall but was up 1% excluding a new subsidy program, and CFO Toby Xu says core commerce profit remains resilient. If Cloud's 45% growth rate slips, this profit hit starts looking self-inflicted.
Watch whether the spending converts: Alibaba's balance sheet can sustain heavy capital expenditure (capex) outflows for years, so affordability isn't the concern. The question is whether that spending converts into Cloud revenue and margin. Fool analyst Tim Beyers noted back in March that continued poor results "may be the catalyst that pushes more companies to aggressively monetize AI efforts and raise prices."

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2) BILL's Profits Are Outrunning Its Sales Growth

Hidden Gems recommendation BILL (NYSE:BILL) makes the software that lets small businesses pay bills and get paid without a finance department. Shares rose about 3% in pre-market trading after fiscal fourth-quarter revenue grew 14% year over year to $436.2 million and non-GAAP operating income surged 80% to $101.6 million. Layoffs and cost cuts drove that gap: Management is now converting more of each new revenue dollar into profit.

Mind the mix, not just the growth: Revenue growth is decelerating from BILL's historical pace, but profit growing more than 5 times faster than revenue is the more important signal. That's operating leverage, not just a bigger top line.
Separate the one-time from the durable: The GAAP operating loss widened because of a restructuring charge, not because the underlying business weakened. If those cuts hold without another charge next quarter, the operating-leverage story is real. If restructuring shows up again, the margin thesis gets shakier.

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3) Debt Reaches $40 Trillion as Yields Hit 2007 High

The U.S. government's total debt closed above $40 trillion for the first time Wednesday, double the level from 2017. About a third of the increase came from pandemic-era borrowing, spanning two administrations. The rest reflects tax cuts, spending growth, and years of deficits. At the same time, the U.S. Treasury doubled its long-bond buyback operations to at least $4 billion apiece, an unusual move meant to calm a sell-off that had pushed the 30-year yield to its highest level since 2007.

Why the timing isn't a coincidence: Bigger deficits mean more bond sales, and more bond sales had been pushing long-term yields higher. The U.S. Treasury is now buying some of that debt back to ease the pressure. Higher yields make money paid years from now worth less today, which hits real estate investment trusts (REITs) and high-multiple growth stocks hardest.
The bill still comes due: A stopgap buyback doesn't shrink the deficit or the $40 trillion balance. If the 30-year yield just stops climbing instead of falling, expect continued pressure on stocks priced heavily on profits still years away.

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4) Apple Sticks With 2027 Launch for Camera AirPods

Bloomberg reports Apple (NASDAQ:AAPL) is sticking to a 2027 launch for camera-equipped AirPods despite a leak this week, suggesting the product was closer than the company had said. A test version of the earbuds appeared in a developer build of Mac software, showing off low-resolution cameras built to feed Apple's Visual Intelligence feature. Supply chain and software issues pushed the product off this year's calendar over the summer, after it had reached advanced employee testing in the spring.

Privacy is the actual design choice: The cameras won't capture photos or video; they'll only scan surroundings to feed Siri and other artificial intelligence (AI) tools, according to Bloomberg's sourcing. That's a direct answer to the backlash Meta Platforms' (NASDAQ:META) smart glasses have faced over recording bystanders without their knowledge.
One product in a bigger 2027 slate: The AirPods are one piece of next year's road map. This includes Apple's first foldable iPhone, its first smart glasses, and a new AI-powered home display, under incoming CEO John Ternus. The real test is whether this hardware wave can reignite growth beyond the iPhone.

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5) No Axon, No Tasers

Team Rule Breakers

Do your holdings pass the Snap Test and the Cola Test? Chief Rule Breaker David Gardner built both to size up a company's competitive position. Take public safety leader Axon Enterprise (NASDAQ:AXON). We first recommended it in Rule Breakers in November 2004 at $28.50 and again in 2005 near $9, then recommended selling in 2009 around $5. We came back to Axon with buy recommendations in 2015, 2018, and 2021 as the business turned around, and it's been a monster performer since. It passes both tests cleanly.

The Snap Test: If Axon vanished, would anyone beyond its users notice? Founder Rick Smith set out to make the bullet obsolete, and Axon's less-lethal Tasers, body cameras, and digital evidence software now reach more than 18,000 law enforcement agencies across 100-plus countries. Public safety everywhere would feel the loss.
The Cola Test: Does it have a Pepsi (NASDAQ:PEP) to its Coke (NYSE:KO)? Axon has segment rivals like Motorola Solutions, HALO Body Cameras, and 10-8 Video Systems. None matches the breadth of Axon's hardware and software.

These tests don't dictate what we recommend, but they're a screen for ideas worth deeper research.

At around $645 today, Axon would be up 69% if it reaches Team Rule Breakers' five-year prediction of $1,088.08.

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6) Your Take

What's a stock you sold too soon, the way Rule Breakers once did with Axon, that you've regretted since?

Share with friends and family, or become a member to hear what your fellow Fools are saying!

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