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Alibaba’s Grip on Consumers Drives Sales Past Estimates

August 17, 2017

By Lulu Yilun Chen

Alibaba Group Holding Ltd.’s hold over the online shopping habits of Chinese consumers drove quarterly sales and earnings that topped analyst estimates.

Revenue jumped 56 percent and profit nearly doubled in the June quarter, fueled by a core commerce business that’s adding users and increasing how much they spend. That’s being bolstered by a cloud computing division with more than a million customers, helping investors shrug off slowing growth in digital media, which includes a Netflix-like streaming service. The shares rose 3.5 percent to $165.15 at 9:50 a.m. in New York.

Alibaba, which generates revenue from merchants on its online platforms, shored up its lead in digital advertising through sharper targeting of its 466 million active consumers. That’s buying time for Chairman Jack Ma to venture into traditional stores, which still account for 85 percent of Chinese retail, where he is experimenting with supermarkets that combine fresh groceries, dining and fulfillment centers.

“What people are most concerned with is still the core e-commerce business and cloud computing unit and both did well,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Services LLP. “For digital media, if it didn’t do well, people weren’t expecting much to begin with and the company might even cut back on spending so that would make investors even happier.”

Shares of Alibaba have gained 82 percent this year through Wednesday, compared with a 7.3 percent gain for the NYSE Composite Index.

Alibaba’s revenue rose to 50.2 billion yuan ($7.4 billion) in the three months ended June. That compares with the 47.9 billion yuan average of estimates compiled by Bloomberg and the company affirmed its target for 45 to 49 percent growth in annual revenue. It reported non-GAAP diluted earnings-per-share of $1.17, versus the $0.94 projected. The results come a day after arch-rival Tencent Holdings Ltd. similarly unveiled earnings well above projections.

“The big data-driven algorithm provides a good balance between merchants’ ad budget” and user preference, Barclays Capital Inc. analyst Gregory Zhao said in a report before the earnings. “While core commerce is the engine for Alibaba’s near-term growth, new retail is expected to shape Alibaba’s business model in the long run.”

Alibaba’s revenue from core commerce surged 58 percent to 43 billion yuan and the business boasts an adjusted margin of 63 percent.

Cloud revenue almost doubled to 2.4 billion yuan. Alibaba is building datacenters around the globe and hiring talent to compete with the likes of Amazon.com Inc. and Google. While the loss-making unit remains a sliver of Alibaba’s overall business, the division could yield 15 percent of revenue by 2021, JP Morgan analysts Alex Yao and Gokul Hariharan said last week.

Considered a barometer of Chinese consumer sentiment, Alibaba has also expanded abroad since buying control of Lazada Group SA to establish a foothold in Southeast Asia, setting up a new arena for its clash with Amazon. That battle is set to intensify with the Hangzhou-based company confirming it led a $1.1 billion investment round in Indonesia’s PT Tokopedia. Just last month Amazon announced the kick-off of its Singapore operations.

Alibaba’s biggest deals of late however have been in old-school brick-and-mortar retail. While Amazon’s acquisition of Whole Foods Market Inc. captured the public’s imagination, Alibaba has been ramping up assets in traditional retail, vowing to revamp a $4 trillion market. It led a $2.6 billion deal to take private Intime Retail Group Co., which operated and managed 29 department stores and 17 shopping malls across the country as of end-June last year. It’s also working with partly owned Suning Commerce Group Co.

The company is betting data and cloud technology can change the way brands monitor inventory and enable them to ship goods based on real-time demand while also rendering multiple layers of middlemen redundant.

The showcase for that effort is HeMa, where customers can buy items such as lobster, get house chefs to cook it, and also have items delivered. Shoppers gets recommendations for products they might be interested in by scanning bar codes via the HeMa app, and pay with their digital wallet Alipay.

“Alibaba Group is the best way to play the Chinese consumer theme,” said Mitchell Green, New York-based managing partner at Lead Edge Capital, which is an investor in Alibaba and has about $1 billion under management. “Chinese people will spend a lot more on consumer goods in a decade than they do today.”

View original article at Bloomberg