With all the headlines on the recent market sell-off in Chinese stocks, you’d be forgiven for forgetting that Chinese companies – like their American counterparts – are actually in the midst of reporting earnings.
One of the big technology players to report earnings on Tuesday night (3 August) was e-commerce and cloud computing giant Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988).
So, with the regulatory intensity heating up, how did Alibaba do in its latest quarter? Alibaba shares in New York fell at the open by 3% on Tuesday but recovered to end the day down 1.4%.
Meanwhile, Alibaba’s Hong Kong-listed shares closed Wednesday down just 0.6%.
Here are three key numbers that long-term investors should focus on from its quarterly results.
1. Slowing revenue growth
Alibaba’s revenue for its first-quarter FY 2021 (for the three months ended 30 June 2021) climbed 34% year-on-year to RMB 205.7 billion (US$31.8 billion).
However, this was a marked deceleration from the 64% year-on-year revenue growth seen in the previous quarter.
Seen as a barometer for the Chinese economy, the slowdown in spending is perhaps worrying for the broader Chinese retail spending outlook.
A recent outbreak of the delta variant of Covid-19 in China could be one reason why Alibaba lowered its guidance for revenue growth for the full year to 30%, from the 41% seen in FY 2020.
That could see Alibaba continue to lose market share in the e-commerce space as competition opens up on the back of regulatory action.
A slower annual active customer (AAC) count also hit sentiment as it reached 1.18 billion.
Its goal of reaching 1 billion users (where it currently has 912 million) in its home market by the end of 2021 looks like a tall order.
2. Cloud computing maintains profitability
There was mixed news in the fast-growing cloud computing segment for Alibaba.
Its cloud division did post another quarter of positive adjusted EBITA, of RMB 340 million, reversing its loss of RMB 1.12 billion in the year-ago quarter.
However, the revenue of its cloud division hit RMB 16 billion, a 29% year-on-year increase, but a slowdown from the 37% growth seen in the preceding quarter.
This was down to revenue decline from a “top cloud customer” which, according to Bloomberg, was ByteDance.
This will hit growth in their international business while the crackdown on education technology firms could also have an indirect impact on the cloud division’s outlook.
3. Big buyback
The negativity around the earnings release was offset by news that management would be boosting its share buyback programme by 50% to a sizeable US$15 billion.
Since 1 April, Alibaba has repurchased around US$3.7 billion worth of its American Depositary Receipts (ADRs).
This could be taken as positive sign that the company feels its shares are currently undervalued, following the recent sell-off.
However, for long-term investors, it could also be construed as negative given that management feels it doesn’t see compelling growth opportunities in which to invest that spare cash.
Watch out for the economy
While regulators and the government will direct the landscape for China’s tech firms, what’s beyond anyone’s control is how the delta variant will impact the Chinese consumer.
If it does get out of control and lockdowns are reinstated then the Chinese domestic economy could be hit hard.
As a result, Alibaba’s core consumer-centric commerce business, which brought in close to 90% of revenue in the latest quarter, could also feel the pain.
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares in any companies mentioned.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.