Alibaba keeps bucking the trend as earnings defy China slowdown
AMID concerns about a slowdown in the growth of the Chinese economy, China’s largest e-commerce company is showing that – for now – business on its platforms is holding steady.
Alibaba Group said yesterday its revenue grew strongly in the three months through the end of September, as the myriad brands and small-time vendors on its online shopping sites kept spending heavily on advertising.
Although Chinese economic growth has slowed, more shoppers are also turning to Alibaba sites while abandoning physical retail outlets like shopping malls.
Alibaba, founded by entrepreneur Jack Ma, said its sales rose 55 percent to $5.14 billion in its second quarter from the same period a year earlier. Net profit dropped 69 percent from a year ago, to $1.06 billion, because of a one-time accounting gain that had raised last year’s bottom line.
While the company has been mostly immune to China’s slowing growth – gross domestic product expanded 6.7 percent in the past three quarters, down from 6.9 percent for all of 2015 – the value of goods sold on Alibaba’s online platforms had begun to plateau.
While it has a strong hold on the online market for China’s middle-class shoppers, almost all of them already own a smartphone, so growth through new customers is harder to achieve.
To compensate for slowing sales growth on its platforms, Alibaba – which makes money on advertising and fees paid by the vendors that set up virtual stores on its platforms – has been doing more to improve targeting of advertisements. It is also seeking to bring in new international brands that pay a fee to sell on its platforms.
Back-end computing power
Given the slowdown, analysts have focused more on other businesses that Alibaba has been building up in recent years. But those businesses, like cloud computing and digital entertainment, all posted losses during the quarter. As Alibaba’s profit margins shrink, investors will put more pressure on the company to extract profit from its newer business.
During a conference call with analysts, Joseph Tsai, the company’s executive vice chairman, said that its cloud computing and digital entertainment units were “coming into their own in terms of scale”.
Still, he warned that the com- pany viewed its investments in new businesses as projects that may not yield profit for the next five to 10 years.
Many have particularly focused on Alibaba’s cloud services which, much like Amazon Web Services, provide easy-to-use, back-end computing power for a wide range of companies.
Revenue from the cloud service more than doubled from a year earlier, to $224 million in the most recent quarter, but posted a $60 million operating loss. Alibaba said it had added 74,000 subscribers to the service over the quarter, raising its total paying users to 651,000. Analysts have predicted that the business could begin producing profit for Alibaba in the coming few years.
“Alibaba has gone beyond the position of an e-commerce play,” said Jessie Guo, an analyst at Jefferies, an investment bank, citing its cloud computing and logistics arms as well as its electronic payments affiliate, Ant Financial.
“We see it as an ecosystem. That means its model is going to be more sophisticated.”
A new spate of public listings by Chinese logistics firms could help Alibaba, Shi Jialong, a technology analyst at Nomura, wrote in a recent note to clients.
These firms, which deliver goods ordered online to customers, have risen on the back of Alibaba’s success, and they could use proceeds from those share sales to expand their networks and enhance delivery capabilities, “which eventually would help improve the quality of services for Alibaba’s customers”, Shi wrote.
Disclose more information
Alibaba’s logistics unit is part of a Securities and Exchange Commission inquiry into the firm’s accounting. In part because of that probe, shortseller interest in the company has risen near peak levels in recent days, according to data from Bloomberg. Alibaba has said it is cooperating with the inquiry and has begun to disclose more information about those operations to investors.
For many, earnings are simply a prelude to Singles Day, an intense shopping holiday on November 11 engineered in part by Alibaba, in which the company’s vendors offer major discounts.
Growth in sales on the day of the event has slowed, and Alibaba is pulling out all the stops this year, featuring a slew of entertainment features including a concert by the American pop star Katy Perry.