Alibaba Group Holding’s earnings report tells us two important things about China’s largest e-commerce company: It’s finding growth and profit through its latest initiatives, including rural expansion, but there are signs of the slowdown in the world’s second-largest economy that’re spooking investors.
Alibaba beat analyst estimates for revenue and profit, traditionally the primary metrics by which a company’s performance is measured. Nevertheless, investors pushed its stock down in US trading to the lowest in more than three months. The likely culprit is slowing growth in the number of transactions at the company, which could signal trouble ahead for consumer spending.
The challenge for Alibaba is that it’s increasingly reliant on China despite aspirations to expand overseas. Chairman Jack Ma has said he wants to eventually get half of the company’s sales from abroad. Instead, the proportion of revenue it garners from outside China has fallen for two successive quarters, to 6%. That’s a liability when the economy is slowing to its lowest growth since 1990 and people such as billionaire George Soros warn of a hard landing ahead.
“Investors are concerned with China’s outlook more than any individual company’s performance at this point,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Service. “Risk appetite for Alibaba is falling as the company’s transaction growth sinks and upside potential for monetisation in the future is limited.”
As China’s largest online emporium, Alibaba is the standard-bearer for an economy that’s navigating a bumpy transition from a high-speed export economy to one anchored by consumer spending. The broader deceleration and Alibaba’s own scale – it handles more e-commerce than Inc and EBay Inc combined – curtails its pace of expansion.Growth in gross merchandise volume across its Chinese retail marketplaces has fallen for at least three straight quarters, with transaction growth dropping to a record low 23% last quarter compared with about 50% a year ago.
Within the country, Alibaba is casting its net beyond first-tier cities, building operations across 12,000 villages.
Alibaba’s response to the growth dilemma has been to entice affluent buyers with imported brands from Starbucks to Lululemon, tap the growing spending power of the rural population, and explore new businesses such as cloud and on-demand services.  “Alibaba continues to grow as urbanisation and an ever more ambitious middle class continues to drive up China’s cost of living and consumption,” said New York-based Brian Buchwald, chief executive officer of Bomoda, a consumer intelligence company with a focus on the Chinese market. “At the heart of it, is continued investment in mobile and simplifying payments for virtual and actual purchases.”