Alibaba Group's growth is not a recovery for investors to celebrate

Alibaba Group’s strong rebound in both revenue and profit last quarter are impressive. Sales climbed 34 per cent and operating income jumped 42 per cent after paltry results the quarter before. But investors should be aware just where those numbers are coming from before they celebrate a recovery.

While primarily an e-commerce company — accounting for half of revenue last financial year — the single-biggest contributor to growth in the June period was what the Chinese company calls “new retail.” In the backward world of online sales, this actually refers to brick-and-mortar businesses such as supermarkets. That category, lumped together as “others,” climbed 88 per cent from a year prior.

Its actual e-commerce business expanded just 21 per cent. The only time it’s been worse was the March quarter, when the fallout from the pandemic resulted in growth of  just 1.1 per cent. 

Alibaba’s other major growth driver was its up-and-coming cloud division, which expanded 59 per cent. On the surface, this is laudable; however, that business continues to bleed money with operating loss margins running at 14.4 per cent, the same level as three months earlier. Sure, this margin has narrowed over the past year, but as yet there’s little indication that Alibaba can be expected to deliver sustained economies-of-scale as that category grows, especially in the face of stiff competition from the likes of Tencent Holdings Ltd.

Leveraging its investments in new areas such as physical retail isn’t a bad thing. It shows a pragmatic approach to investment as management seizes new opportunities for growth. Yet investors who want to cheer a recovery for China’s largest e-commerce company should keep in mind what it is they’re celebrating.