Alibaba is changing. To stick with the stock, investors need faith that Executive Chairman
can pull off a move away from the core e-commerce business that made him one of the world’s richest men.
The Chinese internet giant has been putting a lot of money into businesses beyond pure internet retail over the past year: bricks-and-mortar stores, online videos, and food delivery. These investments have boosted the company’s revenue—up 61% year-over-year last quarter—but dragged down margins, according to results released Thursday. Operating profit last quarter was more than halved from a year ago.
The major reason for the decline was a one-off jump in the cost of stock awards at Ant Financial, Alibaba’s finance affiliate, which owns one of China’s most popular mobile payment systems. Their cost increased by $1.6 billion after a June funding round gave Ant Financial a valuation of $150 billion, up from just $60 billion two years ago.
But even excluding such expenses Alibaba’s operating income only increased by 9%. Many of its new initiatives, such as its Hema supermarkets, logistics subsidiary Cainiao or Ele.me food delivery service, are likely not making much money. Meanwhile, growth is cooling in its core e-commerce operation. Revenue rose 35% last quarter excluding these new projects—still respectable but much lower than in previous quarters.
The new investments may take time to turn a profit. Ele.me has to compete with Meituan Dianping, which is looking to list in Hong Kong at a $60 billion valuation. Meituan has lost money for the past three years, stripping out investment gains and one-offs. Alibaba also has yet to prove that its foray into physical stores will complement its e-commerce business.
Alibaba’s shares rose 3% in early trading, recouping losses incurred this month after disappointing results from other Chinese technology companies, such as Tencent. The stock is now trading on 35 times next year’s earnings, compared to 30 times for Tencent’s. And that assumes Alibaba can return to strong growth next year, as analysts expect.
Tech stocks are never for the fainthearted, but the risks look more acute than ever when the company is exchanging profit growth for investment in startups.