Alibaba Group Holding Ltd is feeling the heat as China’s economy decelerates.
China’s dominant e-commerce company will offer clues to the health of the nation’s middle-class, and how it’s navigating the slowdown, when it unveils earnings today.
While revenue is expected to have risen 44% during the December quarter, that’s its slowest pace of expansion since early 2016 – potentially a sign of spreading consumer malaise.
The company founded by billionaire Jack Ma has been pivotal over the past decade in helping create a $1tn-plus Chinese online shopping arena, the world’s largest.
But the scorching growth that made it an investor darling has moderated, as shoppers buy fewer washing machines or phones while merchants pull back on marketing.
That showed up during Alibaba’s Singles’ Day extravaganza on November 11, when sales growth of 27% was down from 2017’s 39%.
“China’s Internet sector had one of its worst years in 2018, underperforming the market for the first time,” Elinor Leung, an analyst at CLSA, said in a report. “E-commerce results disappointed the most and had the biggest downward earnings revision.”
Alibaba shed about $120bn of market value through Friday since peaking in June as uncertainty from US-Chinese tensions spooked investors in front-line sectors such as technology.
Yet it remains a driving force behind China’s effort to re-balance growth toward services, investing in data to bring retail into the 21st century while creating online platforms like entertainment to compete with Tencent Holdings Ltd.
SuperSymmetry, a Beijing-based consultancy that mines data from millions of online-shopping pages, predicts the value of goods sold on Alibaba’s platform grew by 25.6% in the quarter, up from 20.5% the previous three months.
The firm, which counts well-known venture capital houses Hillhouse,
GGV and Sequoia Capital among its customers, says an uptick in sales of staples and necessities probably spurred business.
Alibaba is also expanding rapidly into Southeast Asia and is beginning to experiment with social media, both potential founts of growth.
Another promising area is advertising in shoppers’ recommendation feeds: it’s completed the roll-out of that interface on main retail app Taobao, creating new ad real estate.
“Revenue growth could surprise if it starts monetising recommended feed traffic in 2019,” Leung wrote. “Margin will continue to contract in 2019, but the decline will moderate after the anniversary of Cainiao and Ele.me’s financial consolidation.”
Despite growing at about twice the sector average, Alibaba trades at a 10% discount to its peers at about 25 times blended two-year earnings.
Its average analyst price target suggests room to climb 26% over the next 12 months.
“Alibaba stock may not bounce back strongly in the near term, but we would be eyeing entry opportunities into recovering earnings growth momentum in the second half,” Han Joon Kim, an analyst with Deutsche Bank, said in a report.
The company however is still investing heavily in other fields.
Profit is projected to have slid 8% in the December quarter as it sustains spending in costly growth areas from cloud computing and food delivery to entertainment.
Ele.me, the unit spearheading Alibaba’s expansion into food delivery, wants to command more than 50% of the market in the short to medium term, the unit’s chief executive officer, Wang Lei, has said.
It accounted for about 34% of the industry in 2018, Bernstein analysts led by David Dai estimate. The company’s operating margin is projected to hit a seven-year trough during the year ending March.
Alibaba itself is bracing for more nervous consumers in 2019.
In November, it trimmed its sales outlook by as much as 6%.
And while SuperSymmetry’s data supports a relatively healthy quarter for Alibaba, it also projects a 10% decline in revenue for fashion retailer Vipshop Holdings Ltd, underscoring the depth of the pullback in discretionary spending.
“We expect a tougher macro-economic outlook for China to weigh on Alibaba’s commissions and advertising revenue for the next few quarters,” said Shelleen Shum, a senior analyst with eMarketer.“Despite a slowing ad market, Alibaba will still remain in the top spot for share of digital ad revenues in China at over 30%.”
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