Forget the world’s chaos for a moment. Alibaba Group Holding Ltd. is doing just fine.
Despite a trade war, the slowing domestic economy and brutally aggressive competition, China’s largest technology company reported revenue and profit numbers that handily beat analyst estimates. Revenue rose a blazing 42%, while net income more than doubled. Shares popped 3% in U.S. trading.
Insulated because of its predominantly domestic business, Alibaba is benefiting from a demographic shift to internet shopping. Chinese online sales accelerated in the June quarter, helped by sales promotions that unfolded across the country’s largest e-commerce platforms. Alibaba’s report dropped just as the risks of a recession spike, U.S.-China trade tensions ratchet up yet again and archrival Tencent Holdings Ltd. warns of a tough economic outlook.
“It’s surprising how resilient Alibaba is,” said Michael Norris, a Shanghai-based research and strategy analyst at consultancy AgencyChina. “There’s a big disconnect between Wall Street, which has really given a beating to Alibaba’s shares, and people on the ground.”
Revenue rose 42% to 114.9 billion yuan ($16.3 billion) in the three months ended June, while net income also came in ahead of expectations at 24.4 billion yuan. That was helped by more than 4.3 billion yuan of pretax profit from Ant Financial, the payments-to-lending affiliate controlled by billionaire Jack Ma.
“Despite the macro environment not being as good as last year, Alibaba has launched a lot of new initiatives and the personalized product feed is helping maintain its growth rate,” said Steven Zhu, an analyst with Pacific Epoch. “Its live-streaming services and collaboration with international brands are helping.”
The economic slowdown is eroding parts of the company’s sprawling empire of e-commerce, retail stores, delivery services and more. Revenue in its digital media and entertainment segment inched up just 6%, despite streaming service Youku enlarging its average daily subscribers by 40%. Growth in its cloud computing division, which commands half the country’s market share, slowed to a still-respectable 66%.
Small and mid-sized enterprises may be leery of spending on ads — Alibaba’s biggest source of income — given the current environment. That prompted Chief Financial Officer Maggie Wu to tell analysts Alibaba is in no rush to monetize its new shopping recommendation feeds.
Longer term, investors have raised flags about the impact on margins of Alibaba’s enormous spending on so-called new retail — its effort to use technology to overhaul physical retailers — and deepen its footprint in lower-tier cities and rural areas. Alibaba said it will continue to invest in those initiatives, as well as on-demand services like food delivery unit Ele.me, which is fighting a fierce, money-losing battle with giant Meituan.
Alibaba is approaching a critical juncture just as Chief Executive Officer Daniel Zhang prepares to replace billionaire co-founder Ma as chairman in September. A U.S. campaign of tariffs and other curbs is heightening uncertainty around the world’s second-largest economy, while the emergence of rivals at home such as Pinduoduo Inc. tests its longstanding dominance of Chinese online retail.
The e-commerce titan may be on the look-out for assets to bolster its lead. Alibaba is in talks to pay $2 billion for NetEase Inc.’s Kaola, which specializes in selling foreign goods to Chinese consumers, local media outlet Caixin reported.
The company is also hatching plans to raise more capital. Alibaba’s quarterly performance bolsters its ambition of pulling off what could be Hong Kong’s biggest share sale since 2010. The company is said to have already filed confidentially for a stock listing, but it’s unclear when it might go ahead with the float given the widespread protests that have gripped Hong Kong over the past 11 weeks. Executives made no mention of the issue during their conference call.
Overall, adjusted earnings per share came to 12.55 yuan versus the 10.3 yuan projected. Net cash slipped 4% in the quarter, depressed by a $250 million cash settlement reached last quarter on a U.S. federal class action lawsuit.
The “key standout for us is that Alibaba’s China commerce business grew 40%, close to twice the rate of the China online retail industry,” said Neil Campling at Mirabaud Securities. “The scale benefits are paying off and Alibaba is enjoying both active consumer growth momentum and higher average spend.”