Alibaba Earnings Report a Mixed Bag

Company will need substantial investment in its core businesses to remain competitive

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Aug 29, 2018
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Chinese e-commerce giant Alibaba Group Holding Ltd. (BABA, Financial) reported strong retail sales growth, even though earnings dropped 41%. The company pleased analysts with a reported 61% increase in sales as consumer spending in China continues to remain robust despite a slowing economy and concern over the effect of lingering trade tensions with the U.S.

Although Alibaba beat analysts’ expectations for revenue, earnings per share were lower than anticipated. The company reported earnings of $1.22 per share on revenue of $12.23 billion; analysts were looking for $1.24 per share on revenue of $12.02 billion for the quarter.

The company reported 576 million annual active users, an increase of 24 million, while monthly active mobile consumers rose by 17 million to 634 million. The company said commission revenue and advertising revenue both increased over the prior-year period.

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Most analysts didn’t react negatively to the disappointing bottom line because expectations are that the company is going to continue to see increased sales due to a growing and more established Chinese middle class, as well as growing profits in retail sales from its burgeoning physical store operations.

Alibaba is banking on additional important trends in the Chinese economy that have proved to be somewhat volatile in previous years: real wage growth increases and healthy and stable household budgets, based on high savings rates and easier access to credit.

The company's revenue increase was due, in part, to its success in establishing a presence in brick-and-mortar stores as a complement to its massive online presence. The company’s strategic plan to diversify beyond its core e-commerce business is a response to the rapid growth of the internet-service sector over the past several years.

Alibaba’s initiative to increase sales through operations of its Hema grocery chain is bearing fruit and helping to increase overall revenue. The company plans to establish a presence in the grocery business is strikingly similar to Amazon’s (AMZN, Financial) entry through its acquisition of Whole Foods last June.

Despite revenue increases, Alibaba reported that earnings fell 41% due to a one-time stock compensation in connection with a reassessment of the valuation of its financial services affiliate, Ant Financial. Without the extraordinary charge against earnings, the company's net income would have increased 33% from the prior year.

Alibaba’s respectable results stand in stark contrast to the declining fortunes of its competitor, Tencent (TCEHY, Financial). The gaming company posted its first profit decline in 10 years and lower-than-projected sales earlier this month as Chinese agencies flex their muscles in regulating video game content, which has adverse ramifications for Tencent’s ability to generate revenue from new video games.

Revenue from Alibaba’s cloud services unit almost doubled. Due to the shifting retail environment in China, however, analysts expect the company to invest in growing both its profitable cloud computing business in addition to its core online retail business in order to maintain its dominant position. Expenses incurred due to implementation of strategic plans for growth and maintenance of its existing lead in its original businesses will cause short-term profits to drop.

Even though the fallout from tensions related to the imposition of tariffs by President Trump impacted certain Chinese goods, Alibaba remains somewhat insulated because most of its earnings are tied to the domestic Chinese retail market.

Disclosure: I have no positions in any of the securities referenced in this article.