Alibaba Group's profit surges 69% on low costs, online shopping in pandemic

Its shares climbed more than 6% in pre-market New York trading. The online retailer reported net income of 46.8 billion yuan, easily surpassing the roughly 35 billion yuan average estimates

Alibaba Group Holding Ltd.’s profit surged 69%, as China’s e-commerce leader kept a lid on costs and shoppers continued to spend online while the pandemic raged.
 

Its shares climbed more than 6% in pre-market New York trading. The online retailer reported net income of 46.8 billion yuan ($6.8 billion), easily surpassing the roughly 35 billion yuan average estimate. Revenue rose 2.1% to 247.76 billion yuan in the December quarter, just ahead of projections. 

The bottom-line gains partly reflect deep cost cuts at a company that once spent aggressively to grow its international and online services businesses. The company is now focused on buoying profits while navigating increasingly tough competition from arch-rival JD.com Inc. as well as up-and-comers such as PDD Holdings Inc.

The anemic sales growth however underscores tricky economic conditions after China abolished Covid restrictions in December. Some investors worry that a sustained recovery in consumer spending may take time, and any rebound might be slow. At the same time, Chinese internet firms from JD to Meituan and PDD are revving up efforts to outdo each other since Beijing began to wind back a bruising crackdown on the tech sector, weighing on margins.

There were other worrying signs for growth at Alibaba. Cloud computing revenue, typically one of the company’s fastest-growing division, inched up just 3% to 20.2 billion yuan. Its core Chinese commerce business slid 1% in the quarter.

What Bloomberg Intelligence Says:

A slowdown in China’s digital-consumption growth, as Covid restrictions are removed, could limit 2023 revenue gains for Alibaba and Meituan if more competing e-commerce and delivery services emerge, such as those from JD.com and ByteDance’s Douyin. Increased access to Alibaba and Meituan services via Tencent’s WeChat might limit the damage from additional competition.

-Catherine Lim and Trini Tan, analysts

As China’s largest e-commerce company, Alibaba is a barometer for consumer demand in the country. Its shares have gained 10% in 2023 as China’s Covid policy u-turn is expected to galvanize the economy, overall. Nationwide online retail sales rose 7.6% year-on-year in the fourth quarter, according to data from the National Bureau of Statistics.

 

For now, Alibaba is likely to continue to focus on cost reduction and profitability rather than new business expansions. To achieve what it’s called “high-quality growth”, the company cut thousands of jobs last year.

The Hangzhou-based firm faces fierce competition in its home market from JD.com and up-and-coming short video and live streaming platforms such as ByteDance Ltd.’s Douyin and Kuaishou Technology, which have stepped efforts to lure customers and woo merchants.

Overseas, the tech giant is curtailing its global ambitions. Alibaba sold off the last of its shares in Indian fintech giant Paytm this month, accelerating a withdrawal from the world’s fastest-growing mobile and internet arena.

Cost curbs — particularly at its domestic consumer services and international commerce — are set to support Alibaba’s margins in the near term. But longer term, it still has to come up with an answer to the intensifying competition.

With its user growth approaching a ceiling, the company is increasingly focusing on areas such as cloud computing services. After cloud sales — once the company’s biggest driver — notched its slowest-ever pace of growth in the September quarter, Zhang took on the role of acting president of Alibaba Cloud Intelligence and enterprise communications app DingTalk.

Once the most valuable company in China, Alibaba is now at risk of looking more like a utility after Beijing launched its sweeping crackdown on the tech industry about two years ago. The government forced Alibaba’s finance affiliate, Ant Group Co., to call off what would have been the world’s largest initial public offering in 2020, and then launched reforms that have undercut Alibaba’s business model.

Though Beijing has begun to unshackle the tech sector, granting Tencent Holdings Ltd. a clutch of game titles and allowing ride-hailing giant Didi Global Inc. to resume signing up new users, an Ant IPO is still up in the air and Alibaba’s plan to move its primary listing to Hong Kong was delayed.