Alibaba (BABA) and Tencent Holdings (TCEHY), two of China’s largest Internet companies, have recorded double-digit sales growth for years. But now they’re stuttering amid several challenges that have besieged most of the country’s internet stocks.
Chinese companies face a convergence of threats to their businesses. These include a resurgence of Covid-19 shutdowns, onerous regulations, supply chain issues, higher logistics costs, currency depreciation, inflation and a real estate downturn.
Moreover, these obstacles come amid a deteriorating economy both at home and abroad. China’s national statistics bureau reported last week that economic activity slowed in October. Retail sales fell unexpectedly for the first time in five months and exports slowed, as did factory output growth.
The impact of these challenges was evident in the earnings reports from Alibaba and Tencent over the past week. Both companies beat earnings expectations but posted weak sales performance for the second straight quarter.
Alibaba’s domestic e-commerce sales receipt
At Alibaba, revenue for the September quarter rose just 3% to $29 billion. This came after flat sales were first reported in the previous quarter.
Worse, Alibaba’s core domestic e-commerce business saw its revenue decline 1% year over year. Although user traffic remained stable during the quarter, purchase frequency declined.
Alibaba CEO Daniel Zhang said the economy is the company’s most pressing concern.
“The macro environment would be the most important determinant not only for Alibaba but for all players in the consumer space, both online and offline,” he said on the company’s post-earnings conference call. The economy affects consumer confidence, demand and willingness to spend, Zhang said.
After Alibaba wrapped up its 11.11 Global Shopping Festival, known as Singles’ Day, on Nov. 11, it said the number of shoppers during the event decreased compared to last year’s event.
Following Alibaba’s earnings report, Baird analyst Colin Sebastian lowered his price target on Alibaba stock from 140 to 120. However, he kept his outperform rating.
“While we expect revenue to hold up in the near term, largely macroeconomic in nature, we believe Alibaba has the potential to generate significant operational leverage as e-commerce and services growth accelerates,” said Sebastian in a notice to customers.
Tencent revenue falls in third quarter
Among Chinese internet stocks, Tencent reported disappointing third-quarter sales. Quarterly sales declined 2% year over year to $19.7 billion. This follows a 3% decline in the previous quarter.
Tencent is closing some unprofitable companies and laying off employees.
“While the macro environment is still challenging, our efficiency initiatives have enabled us to deliver slightly positive year-over-year earnings growth, a significant improvement from recent quarters,” Tencent President Martin Lau said in a conference call.
Tencent is the world’s leading video game maker and owner of the popular super app WeChat. The app is used for messaging and funding, as well as social media interactions and gaming.
Internet stocks pressured to divest holdings
With its earnings report, Tencent announced that it will return most of its $22 billion stake in food delivery company Meituan to investors through a dividend.
In March, Tencent also divested most of its holdings in JD.com. It paid out over $16 billion worth of the company’s stock to shareholders as a one-time dividend.
Alibaba has made similar equity divestitures. The divestitures come as a result of a series of crushing restrictions by Beijing regulators beginning in 2021. These measures targeted the sprawling empires of these internet stocks, which in some cases have displayed monopoly power.
Beijing also restricted video game development, playing time and content, and disrupted business models overall. That was particularly detrimental to Tencent.
Coverage of other Chinese internet stocks
E-commerce company in China JD.com (JD), however, managed to buck the negative trends with its quarterly earnings report. JD reported double-digit revenue growth of 11.4%, accelerating from 5.4% growth in the previous quarter.
Along with other Chinese internet stocks baidu (BIDU) will release quarterly results on November 22nd. Baidu offers various Internet services, including China’s largest search engine.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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