Alibaba Group Holding Ltd’s quarterly earnings beat expectations on its expansion into areas from cloud computing to entertainment, a rare bright spot as many Chinese companies fell short of financial estimates.
Net income at China’s biggest e-commerce company rose 37 per cent to 33.1 billion yuan ($4.9 billion, Dh18 billion) in the December quarter, thanks in part to a one-time accounting gain from taking control of an internet services affiliate. That outpaced the 22.1 billion yuan analysts had projected. While revenue rose 41 per cent to 117.3 billion yuan, that was the slowest pace in more than two years and lagged the 119.4 billion-yuan projected.
Alibaba’s results came after a stunning day in China when at least 20 companies warned investors that full-year earnings would fall short of expectations. The e-commerce giant drove revenue growth during its busiest quarter, a period that includes its annual Singles’ Day promotion, by improving marketing tools and personalised recommendations that spurred purchases.
“The market might view this as the end of the adjustment period and the worst is behind us, and send shares up,” said Eric Wen, founder and CEO of Blue Lotus Capital Advisors. “E-commerce active customer growth is good, mobile monthly active users of e-commerce app is good, but profitability was pretty bad as expected.”
Margins slid about 10 percentage points but within expectations, he said.
Shares of Alibaba were up about 2 per cent in pre-market trade, after sliding 1.3 per cent on Tuesday.
Adjusted earnings per share was 12.2 yuan compared with the 11.2 yuan projected. The e-commerce giant booked a one-time non-cash gain of 21.99 billion yuan in the December quarter after re-valuing on-demand services arm Koubei. The share of losses from numerous companies it backed also narrowed sharply.
“Alibaba is the dominant and most profitable leader in China e-commerce,” David Dai, an analyst at Bernstein, wrote in a report before the release. “The general macroeconomic environment should improve in the second half of 2019 as the Chinese government introduces measures to stimulate the economy and US China trade war stabilises.”
Growth also sprang from billionaire Jack Ma’s decision to take control of its main delivery network, a meals-on-demand service and video platform Youku. Those expansions however have shifted the company away from an asset-light model.
Alibaba itself is bracing for more nervous consumers in 2019. In November, it trimmed its sales outlook by as much as 6 per cent. The company is investing to counter a slowdown in the world’s second largest economy. Its cloud business accounts for more than half of the Chinese market now, Vice Chairman Joseph Tsai said this month. Alibaba’s cloud business is now supporting companies in the retail and manufacturing industries, underpinning potential growth of 46 per cent a year up to 2022, Bernstein estimates.
Cloud revenue rose 84 per cent in the December quarter, while digital media and entertainment grew sales 20 per cent.
“The AliCloud business should be counter-cyclical because public cloud adoption should accelerate amid an economic slowdown due to better cost savings,” said Grace Chen, an analyst with Morgan Stanley.
Alibaba could also tap new revenue spigots such as personalised feed recommendations, which now generate more traffic than traditional search on its e-commerce platforms. The feed on Taobao, one of Alibaba’s largest shopping platforms, pushes products that it thinks users will likely purchase based on their history. Many users browse those recommendations to kill time, driving engagement.
The company took control of logistics business Cainiao in 2017 to ensure delivery of packages. Ele.me, the unit spearheading an expansion into food delivery, wants to command more than 50 per cent of market share in the short to medium term, the unit’s chief executive officer has said. It accounted for about 34 per cent of the industry in 2018, Bernstein analysts led by David Dai estimate. That’s all eating into the company’s margins.