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Alibaba's revenue jumps but investments to prolong margin squeeze

Stock MarketsAug 24, 2018 01:50AM ET
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© Reuters. FILE PHOTO: The logo of Alibaba Group is seen at the company's headquarters in Hangzhou

By Cate Cadell

BEIJING (Reuters) - Alibaba Group Holding Ltd (N:BABA), China's biggest e-commerce firm, warned on Thursday investments in its delivery business would keep pressuring profits even as it reported its strongest-ever quarterly revenue growth, largely in line with estimates.

U.S.-listed shares of Asia's most valuable public company rose early on Thursday but then erased gains to end the day down 3 percent.

While Alibaba makes money from its core businesses, including online marketplaces Tmall and Taobao and payment platform Alipay, it also has far flung investments in sports content, microchips and facial recognition technology.

"As Alibaba continues to invest in New Retail initiatives, the consolidation of lower margin businesses such as Cainiao,, and Lazada is shifting the long term margin profile of the core business," Baird analyst Colin Sebastian said in a note.

"We expect management's ongoing focus on New Retail market share will continue to be a profitability headwind for the foreseeable future," said Sebastian, cutting his price target on the stock by $5 to $215.

In April-June, Alibaba's gross margin was 11 percent versus 29.2 percent a year earlier, the lowest since the company's 2014 stock exchange listing. Profit margins at Alibaba are typically well above 20 percent.

On Thursday, the company said it had formed a holding company for its food delivery platform and food and lifestyle services firm Koubei, for which it had received over $3 billion in new investment commitments, including from SoftBank Group Corp (T:9984) and Alibaba itself.

Quarterly net profit at Alibaba, led by China's second-richest man Jack Ma, plunged 41 percent, hurt by a one-time charge for stock-based compensation paid to employees to account for a jump in valuation of its affiliate Ant Financial [ANTFIN.UL].

Without the charge, Alibaba said its net income would have risen by 33 percent from the year-ago period. Excluding one-off items, the company earned 8.04 yuan per share, or $1.22 per share, missing the average estimate of 8.15 yuan per share.

Ant Financial, China's largest financial technology company, is controlled by Ma and has a profit sharing agreement with Alibaba. It announced a $14 billion fundraising in June, which valued it at around $150 billion.

Ant Financial, which is expanding rapidly into foreign markets, is locked in a costly battle for market share at home with WeChat Pay, owned by Alibaba's arch rival Tencent Holdings Ltd (HK:0700).


Shares of Alibaba, which has a market value of about $446 billion, are nearly flat so far this year, including Thursday's losses, compared with a 14 percent rise in the tech-heavy Nasdaq Composite Index (IXIC).

But Alibaba's core e-commerce business is still growing strongly at a time when the broader Chinese economy is slowing amid a trade tariff war with the United States.

It has been pushing into brick-and-mortar to complement its massive online business and stay ahead of Inc (O:JD), backed by Tencent.

Both and Tencent reported slower revenue growth in the latest quarter. Tencent was hurt by weak gaming revenue, while said that a slump in summer sales hurt profit.

Sales at Alibaba's core e-commerce business swelled 61 percent to 69.2 billion yuan. Total June quarter sales jumped 61 percent as well to 80.9 billion yuan ($11.77 billion). Analysts expected 80.7 billion yuan, according to Thomson Reuters I/B/E/S.

Revenue in Alibaba's cloud computing business nearly doubled to 4.7 billion yuan, while entertainment unit revenue rose 46.4 percent to 6 billion yuan.

Alibaba's revenue jumps but investments to prolong margin squeeze

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