Alibaba’s sales surge as Jack Ma’s free spending bears fruit

The logo of Alibaba Group is seen at the company’s headquarters in Hangzhou, Zhejiang province, China, July 2018. (Reuters pic)

HONG KONG: Alibaba Group Holding Ltd reported its fastest pace of growth in more than four years by wringing more revenue from the newer arenas of cloud computing and entertainment, avoiding the disappointments that hit rival tech giants.

Billionaire Chairman Jack Ma’s free-spending ways helped the e-commerce heavyweight side-step a Chinese economic slowdown and best its rivals this earnings season. Arch-foe Tencent Holdings Ltd posted its biggest profit drop in a decade after it ran afoul of regulatory tangles, while internet stalwarts from Facebook Inc to Twitter Inc grappled with fundamental issues such as waning user growth.

Shares of Alibaba rose as much as 4.9% then later fell to close 3.2% lower in New York. While revenue growth was strong, profit declined with a surge in compensation expenses and the company announced more than US$3 billion in new funding for its newly acquired food delivery arm. Broader trade concerns also loomed over the markets.

“It is clear that nobody wins in a trade war,” Vice Chairman Joseph Tsai said on the earnings call with analysts. “Alibaba’s business is focused on capturing the Chinese domestic consumption opportunity and less reliant on Chinese exports.”

Revenue at China’s biggest e-commerce company climbed 61% to US$11.8 billion (80.9 billion yuan) in the three months ended June, matching the average estimate. Alibaba’s mounting spending, such as on acquisitions and expanding its Hema supermarket chain, is hurting margins though. Adjusted earnings per share of 8.04 yuan fell short of the 8.19 yuan estimate.

“A lot of growth is coming through acquisitions,” Kim Eng Securities analyst Mitchell Kim said. “With Alibaba investing in retail and having outside investors getting in, that could establish the valuation that investors need to account for.”

Net income slid 41% to 8.7 billion yuan, though that’s after taking into account an increase in the valuation of affiliate Ant Financial, which boosted the expense of shares awarded to employees. That topped the 7.6 billion yuan projected.

Alibaba’s been busy expanding its Hema supermarket chain and now operates 35 of those stores – a mix of sit-down dining and groceries plus delivery hub. Much cash also is flowing into China’s US$1.3 trillion food retail and services industry, where it’s trying to hold its own against delivery giant and super-app Meituan. Alibaba said Thursday it’s teaming with SoftBank to put more than US$3 billion into Alibaba now intends to merge with Koubei, another unit focused on connecting restaurants to the internet.

Ma is also spearheading an expensive foray into the US$4 trillion retail sector. Alibaba acquired a department store chain with 29 stores and 17 shopping malls last year and also bought a slice of China’s largest hypermarket chain. It’s been shelling out on content for its Youku video-streaming service to stay abreast of Tencent and Baidu Inc. And heavy investment in data centers for its cloud computing arm helped almost double revenue in that division to 4.7 billion yuan.

However, those burgeoning businesses may be helping mask a slowdown in Alibaba’s bread-and-butter business, said Steven Zhu, an analyst with Pacific Epoch.

Customer management revenue – the lucrative fees it charges for helping merchants with marketing – grew just 26% in the quarter, from 35% in the previous three months. That reflects how rivals such as Inc and Pinduoduo Inc are siphoning off Alibaba’s merchants and may affect the bottom line in coming quarters, Zhu said.

“This is probably the slowest growth ever,” he said. “They are swapping high-quality revenue with low-quality revenue.”