Alibaba Spends for Sales Growth as Most Lucrative Business Slows

(Bloomberg) -- Alibaba Group Holding Ltd. reported its fastest pace of growth in more than four years by wringing more revenue from its push into cloud computing and entertainment, mitigating the slowdown of its most lucrative business.

Billionaire Chairman Jack Ma’s free-spending ways helped the e-commerce heavyweight side-step a Chinese economic slowdown and fallout from the U.S.-China trade battle. But competition from rivals backed by Tencent Holdings Ltd. is hitting the lucrative fees it charges to help merchants with marketing, a measure known as customer management revenue, and creating a threat to future profit.

Alibaba shares whiplashed after the results as early gains were erased and the stock closed more than 3 percent lower. The earnings come after a rout among tech stocks, including Tencent as the owner of the near-ubiquitous WeChat messaging and social network posting its biggest profit drop in a decade. Meanwhile internet stalwarts Facebook Inc. and Twitter Inc. are grappling with fundamental issues such as waning user growth.

“The market concern is that you have this very strong, very mature e-commerce business that has been stretching for some time, now you are facing more competition and mostly from Tencent," said Eric Wen, founder of the Blue Lotus Research Institute.

While revenue growth was strong, Alibaba’s profit declined with a surge in compensation expenses and the company announced more than $3 billion in new funding for its newly acquired food delivery arm.

While the company is continuing to expand, it’s doing so against the backdrop of rising tensions between Beijing and Washington.

“It is clear that nobody wins in a trade war,” Vice Chairman Joseph Tsai said on an earnings call with analysts. “Alibaba’s business is focused on capturing the Chinese domestic consumption opportunity and less reliant on Chinese exports.”

Revenue at China’s biggest e-commerce company climbed 61 percent to 80.9 billion yuan ($11.8 billion) in the three months ended June, matching the average estimate. Alibaba’s mounting spending, such as on acquisitions and expanding its Hema supermarket chain, is hurting margins though. Adjusted earnings per share of 8.04 yuan fell short of the 8.19 yuan estimate.

There are now 35 Hema stores offering a sit-down dining and groceries plus delivery hub. Much cash also is flowing into China’s $1.3 trillion food retail and services industry, where it’s trying to hold its own against food delivery giant and super-app Meituan. Alibaba said Thursday it’s teaming with SoftBank to put more than $3 billion into Ele.me. Alibaba now intends to merge Ele.me with Koubei, another unit focused on connecting restaurants to the internet.

“A lot of growth is coming through acquisitions,” Kim Eng Securities analyst Mitchell Kim said. “With Alibaba investing in retail and having outside investors getting in, that could establish the valuation that investors need to account for.”

Read more: Alibaba Escalates Attack on Meituan Ahead of Rival’s IPO

Net income slid 41 percent to 8.7 billion yuan, though that’s after taking into account an increase in the valuation of affiliate Ant Financial, which boosted the expense of shares awarded to employees.

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However, revenue growth in newer businesses may be helping mask a slowdown in Alibaba’s bread-and-butter e-commerce operations, said Steven Zhu, an analyst with Pacific Epoch.

Customer management revenue grew just 26 percent in the quarter, down from 35 percent in the previous three months. That reflects how Tencent-backed rivals such as JD.com Inc. and Pinduoduo Inc. are siphoning off Alibaba’s merchant, Zhu said.

“This is probably the slowest growth ever,” he said. “They are swapping high-quality revenue with low-quality revenue.”