Moderate growth amid a challenging landscape may be Alibaba’s new normal

Alibaba can’t seem to catch a break. Back in April, after Chinese state media reported that a man with the surname Ma was detained, Alibaba’s stock price plunged by nearly 9.4%, a loss of around USD 26.5 billion.

Such is the impact of the negative hype that has weighed on Chinese tech behemoth Alibaba in recent years.

Alibaba’s troubles began in October 2020 when its co-founder, Jack Ma, criticized Chinese regulators for stifling innovation. Soon after, Alibaba’s fintech subsidiary, Ant Group, which was originally slated for dual listings in Shanghai and Hong Kong in 2020, was suspended by Chinese regulators at the eleventh hour.

More bad news ensued. Last year, Alibaba was fined RMB 18.2 billion (USD 2.8 billion) over monopolistic market practices. In 2021, the e-commerce giant was also embroiled in a sex scandal after an employee’s account of her ordeal went viral on social media.

The bad press took a toll on the company’s stock price. In 2014, Alibaba’s IPO in New York set a record as the world’s biggest public stock offering, raising USD 25 billion, making the tech giant one of the most valuable companies in China. But by the end of 2021, Alibaba’s stock had lost almost 50% of its market capitalization, slumping to USD 361 billion from the highs of USD 846 billion in October 2020.

Recently, investors have been jittery about Alibaba’s sluggish earnings and long-term outlook.

In its latest earnings report, Alibaba’s quarterly revenue grew 9% year-on-year to RMB 204.05 billion (USD 30.3 billion) in the January-March quarter, beating estimates. But the company’s latest financial figures also marked the group’s slowest quarterly growth since its IPO in 2014.

Meanwhile, several of China’s largest technology firms also posted their slowest revenue growth on record. Alibaba’s arch-rival, internet giant Tencent, reported a profit of RMB 23.4 billion (USD 3.5 billion) for the three months ended March 31, down 51% from RMB 47.8 billion a year ago. Major competitor JD.com announced its slowest quarterly revenue growth on record for the first three months of 2022, recording RMB 239.7 billion (USD 37.8 billion).

This raises a question: Amid the regulatory crackdown and a slowing economy, were investors’ concerns about Alibaba’s prospects overblown?

In recent years, the conglomerate also made headlines for aggressive restructuring and management shake-ups, triggering speculation about potential trouble at the firm, even though it is not uncommon for companies to restructure during a downturn.

In one such significant reorganization last December, the Chinese internet giant split its global and domestic e-commerce businesses into two separate units. Only time will tell if this decision proves fruitful.

As China’s internet penetration grows saturated, it has become prohibitively expensive for e-commerce companies to acquire new Chinese customers and retain existing ones, according to a recent report by McKinsey & Company. Such costs have risen by 20% per year over the three years leading up to the COVID-19 pandemic.

This could be the reason why Alibaba chose to leverage its overseas e-commerce business as a major pillar of growth. In May, the conglomerate upped the ante and injected USD 378.5 million into its Southeast Asia arm, Lazada. The tech giant also aims to expand Lazada to Europe as a new source of growth.

So far, this approach looks promising. Lazada recorded a GMV of USD 21 billion and 159 million active users in the 12 months ended September 2021. In its latest quarterly earnings, Alibaba’s international commerce retail business grew 7%, mainly driven by Lazada and Turkish e-commerce arm Trendyol.

The fact is, developing a global expansion strategy has become a way for some of China’s top tech companies to generate revenue and drive growth. Chinese tech firms are also thinking about expanding overseas much earlier in their lifecycle, in part catalyzed by the tech crackdown.

Nonetheless, international expansion alone won’t be enough to drive growth. Since its inception, Alibaba has completed over 300 acquisitions. Over the years, the e-commerce giant has poured millions of dollars into new offerings such as discount app Taobao Deals and group purchasing app Taocaicai, both of which have incurred operating losses since they launched. While these ventures can be costly and may come with integration risks, they could bring synergies and new growth opportunities.

Cloud Computing, comprising Alibaba Cloud and workplace app DingTalk, is a prime example of a business line that is emerging as a bright spot for the tech giant. Despite over a decade of losses, the division achieved its first profitable fiscal year, generating RMB 18.97 billion in revenue for the March quarter in 2022, an increase of 12% year-on-year.

Currently leading in China’s cloud computing market, which is valued at USD 158 billion annually, Alibaba had a 38.3% market share as of Q3 2021, with growth at 33.3%, driven by the internet, financial services, and retail sectors.

In all, is it doomsday for Alibaba? Unlikely.

The company’s credit profile remains stable, underpinned by its market leadership in China’s commerce market and cloud services, and its conservative capital structure with ample liquidity, according to a recent report by Fitch Ratings.

Still, major challenges await the tech giant. One is intensifying domestic competition. Alibaba’s rivals have overtaken the company in some segments of China’s e-commerce space. For example, short video app Douyin has emerged as a major competitor in live commerce, while agriculture platform Pinduoduo has taken the lead in rural and budget e-commerce.

Another difficulty is weakening consumer demand. But this could soon improve as there are signs that the Chinese government may be reversing course to bolster the economy. In May this year, Chinese banks cut a key interest rate for long-term loans to shore up China’s slowing economy.

It won’t be easy for Alibaba to overcome these challenges, as moderate growth looks to be the new normal. But it may also present an opportunity for the tech giant to work on boosting sustainable business growth in its next phase of development.

Source: KrAsia

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