ii view: Alibaba results overshadowed by Ant Group

This Chinese retail giant has suffered a big disappointment, but should it worry investors?

Third-quarter results to 30 September

• Revenue rose by 30% to US $22.84 billion
• Adjusted earnings (EBITDA) up 28% to $7 billion
• Net income down 63% to $3.9 billion

Chief executive Daniel Zhang said:

“Alibaba had another strong quarter. We continued to help businesses recover and find new opportunities for growth through digitalization in the post-pandemic landscape. The solid performance of our core commerce and robust growth of Alibaba Cloud are the direct results of our commitment to value creation for customers.”

ii round-up:

Chinese online retailer Alibaba (NYSE:BABA) reported sales which marginally beat analysts forecasts in its latest quarterly results. But it did say it was continuing to assess the cancelled stock market listing of its roughly one-third-owned affiliate company Ant Group. 

A 30% jump in revenues year-over-year to $22.84 billion surpassed forecasts for nearer to $22.7 billion. However, the cancelled listing of Ant removed its ability to easily sell down its exposure to a company which, when listed, was expected to be worth over $300 billion. Electronic payments and fintech company Ant Group and Alibaba both share executive involvement by Chinese businessman Jack Ma.   

Alibaba shares fell by around 8% in US trading following news of the cancelled Ant Group stock market listing. Year-to-date, its shares are up by just over a third. Shares for US online retailing mammoth Amazon (NASDAQ:AMZN) are up over 75% in 2020 as it continues to benefit from consumers preference to shop from home under the Covid-19 global pandemic. Shares for US online selling site eBay (NASDAQ:EBAY) are also up by around a third year-to-date. 

Ant Group runs Alipay, the main online payment system in China. Speculation persists that previous comments made by Jack Ma upset Chinese authorities. On Monday, the Chinese central bank and regulators issued new draft rules for online micro-lending, which could impact Ant Group.  

Alibaba profits attributable to shareholders fell by 63% due to a one-off gain booked in last year’s results in relation to its Ant Group share stake. Adjusted profits rose by 28% to $7 billion. 

Listed on the New York Stock Exchange, Alibaba operates across the four divisions of Core Commerce - by far its biggest sales generator - Cloud Computing, Digital Media and Entertainment and Innovation initiatives. Annual active consumers at its core commerce China retail marketplaces increased by 15 million from the previous quarter to 757 million. Overall, monthly active users now total 881 million. 

Sales for its cloud computing business, which competes with the likes of Microsoft (NASDAQ:MSFT), Amazon and Alphabet (NASDAQ:GOOGL) rose by 60% to $2.2 billion. Earlier this year, management outlined plans to invest around $28 billion in the division over the next three years. It remains lossmaking for now. 

ii view:

Alibaba has made huge progress in its two-decade history. It achieved the historic milestone of $1 trillion in gross merchandise volume across its digital platforms over its last full-financial year. A new chapter for the company recently commenced as founder Jack Ma passed the leadership reins to Daniel Zhang. 

For investors, the cancelling, if possibly only temporary, listing of Ant Group has come as a sharp disappointment. However, a significant share stake in a fintech company which excites investors does add another potential growth element to its armoury. The reminder served by possible sudden changes in Chinese regulation is also stark, while the somewhat colder relations between the US and China are worth remembering, not to mention the constant debate regarding tech valuations. 

That said, exposure to consumers in the world’s second biggest economy remains an enticing prospect, while its stock market value of over $700 billion still trails the $1 trillion plus of Amazon, arguably leaving room for further potential growth. 

Positives

• Exposure to the world’s second biggest economy
• Looking to grow sales outside of China

Negatives

• Chinese companies could be delisted in the US
• Cloud computing is loss making

The average rating of stock market analysts:

Strong buy