Jack Ma’s shopping spree is starting to weigh on Alibaba’s bottom line just as profit and revenue growth ease. And investors have shaved about $60 billion off its market value to voice their displeasure. Alibaba Group Holding Ltd. is projected to post its first decline in profit in a year and a half — the result of folding in major loss-making businesses and heightened spending to fend off a charge by Tencent Holdings Ltd. into retail and payments — traditionally its turf. While revenue is expected to climb 53 percent to 59 billion yuan ($9.3 billion), that would actually be its smallest gain in seven quarters.
China’s biggest online emporium is trying to spend its way out of slowing growth in its core business. Inroads into logistics, cloud computing, online video and physical retail have come at a cost, eating into margins and pushing the company further from its once-cherished “asset-light” philosophy. Coupled with a global technology sell-off, concerns about its growing spending have clobbered its shares more than 10 percent since a January record high. And that margin decline could well carry into the coming financial year, said Jerry Liu, an analyst with UBS Group AG.
“We expect margins to decline in financial year of 2019 before stabilising and then improving over the long term,” Liu said in a research report. “Most of Alibaba’s initiatives are in the early stages, with significant investment poured into video and payments recently.” That applies equally to Tencent, which has lost more than $100 billion of market value since its Jan. 23 apex. But it’s Alibaba, which rose a tad in New York on Thursday, that leads Wall Street with $34 billion in short-seller bets.
Ma is in a way channeling fellow e-commerce pioneer Jeff Bezos over at Amazon.com Inc., which for years bled losses but assuaged nervous shareholders by sustaining breakneck top-line growth. The idea is to lay the foundation for a web empire spanning all aspects of retail, internet computing and data. John Ho, founder of Janchor Partners Ltd., a $4 billion fund whose 2012 stake in Alibaba has grown several times in value, said the Hangzhou-based behemoth could become a trillion-dollar company in less than a decade.
But things are less assured in the near term. Risk-averse traders have dumped tech stocks globally as trade tensions between China and the U.S. escalate and Facebook Inc.’s Cambridge Analytica debacle spur fears of a regulatory clampdown. Investors will thus be looking at its full-year revenue guidance when Alibaba reports earnings on Friday. Liu estimates Alibaba’s revenue growth at the low- to mid-40 percent range for fiscal 2019. That’s — again — down from the 48 percent that Alibaba’s forecasting for the year ended March.
Ma’s lieutenants have little choice but to continue spending. It’s not just that its main markets are getting saturated, it also needs to fend off Tencent — in e-commerce, cloud computing, payments, entertainment and now even brick-and-mortar retail. The WeChat operator has dramatically stepped up investment in those fronts. Alibaba’s decision to take full control of several loss-making companies is another reason margins will continue to thin. It said in April it would seek full control of food delivery service Ele.me, conferring a value of $9.5 billion on a company that’s locked in a cash-burning battle with Tencent-backed Meituan Dianping. Both companies are expanding in neighborhood services and heavily subsidizing restaurant deliveries.
While Ele.me’s consolidation isn’t expected to kick in until the June quarter, Alibaba’s already taking hits from its loss-making Cainiao logistics and Youku video businesses. It’s assumed control of Southeast Asian e-commerce platform Lazada to drive an expansion overseas. And it’s formalizing its relationship with payments affiliate Ant Financial by taking a stake in the internet finance giant. Finally, Alibaba is splurging on datacenters to maintain its lead in a Chinese cloud computing business JPMorgan Chase & Co. estimates could reach 152 billion yuan by 2021. Alibaba alone could account for 60 percent of that market, double its share from last year, it said. It could’ve almost doubled its cloud revenue in the March quarter alone, estimates John Choi, an analyst at Daiwa Capital Markets Hong Kong Ltd.
For now however, investors may continue to handle Alibaba’s stock with kid gloves. The “recent stock price pressure reflects investor’s concerns about organic growth momentum and blended margin decline,” said Ella Ji, an analyst at China Renaissance Securities in a report.