Alibaba Group is expecting tough times, as the once high-flying stock of China’s biggest e-commerce company has also been grounded in recent months, declining 30 percent since reaching all-time highs on June 14.
On Nov. 2, the firm alarmed investors by cutting its revenue growth estimates for the rest of the fiscal year, which ends in March 2019. Public companies regularly update analysts and investors on future financial projections; negative changes to forward guidance typically drive stock prices lower.
In the latest quarter, Alibaba’s revenues were $12.4 billion, a 54 percent increase from the same period a year ago, but less than Wall Street analysts expected. Profit margins were slim, as the company increased capital expenditures on retail, cloud computing, and shipping infrastructure.
Lowered revenue guidance was due to a decision not to “monetize incremental inventory generated from our growing users and engagement,” CEO Daniel Zhang told Wall Street analysts on its quarterly earnings call Nov. 2. Put differently, Alibaba decided not to dial up ad placement, despite a growing number of users.
It was a disappointing update for investors, who sent Alibaba’s New York-listed shares lower by 2.4 percent on the day.
Hangzhou-based Alibaba’s Taobao Marketplace and Tmall are the most popular online stores in China. In recent years, the firm has also expanded into new categories such as entertainment, cloud computing, and financial services.
Alibaba’s results are often seen by investors as a bellwether for Chinese consumer spending and an important indicator of its domestic economy. The online retailer will hold its all-important Singles’ Day shopping event on Nov. 11, when Alibaba expects to achieve a record number of orders, including participation from foreign merchants and consumers.
Concerns Around Domestic Economy
Alibaba’s existing woes have little to do with the trade war between China and the United States, and everything to do with intensifying competition and a slowing economy within China.
Maggie Wu, Alibaba’s chief financial officer, told analysts on its quarterly earnings call that “merchants are facing challenging times.” Zhang added, “The global economy is in a state of uncertainty.”
This year had already been unkind to Alibaba, as the pending retirement of founder and Chairman Jack Ma, and declining margins have weighed on its stock.
Recent concerns around China’s economy and consumer spending will have must longer lasting effects for the company and the sector.
In past stock-market downturns, Chinese consumers had been a constant bright spot. Hundreds of millions of people rose into the middle class over the last decade and used their increased earning power on cars, apparel, electronics, and quality food products. But more recently Chinese shoppers have been tightening their purse strings. Alibaba executives noted on its earnings call that sales of electronics, appliances, and big-ticket items have been slowing.
The company’s dimmed sales outlook suggests the economic downturn is beginning to affect the non-financial parts of the domestic economy, including China’s middle-class consumers.
What’s causing a souring mood among consumers? Few reliable consumer confidence gauges exist in China, but negative headlines around the ongoing trade war have increased the level of fear among the middle class.
Recent crackdowns on shadow banking—from insurance products to peer-to-peer lending—have likely put a dent in consumer income. Increased e-commerce competition and more sophisticated shopping behavior also are making it more difficult for companies fighting for their share.
But there’s more. Effects of U.S. tariffs will be felt in the near-future–factory activity is slowing, and some manufacturers have shifted production to South Asia. This will lead to job losses and a drop in retail spending from the middle class.
The Communist Party leadership seems to be aware of the gathering clouds. On Nov. 1, China’s top policymakers held a rare, high-level symposium with private sector entrepreneurs, with the leaders pledging more support for businesses, including lower VAT and better access to financing.
“This, together with the quarterly politburo meeting at end-October, affirms our view of more policy easing to boost business confidence and arrest downside risks to growth,” Morgan Stanley analysts wrote in a research note.
Further easing measures on the table include potential proposals to halve the tax on car purchases to 5 percent, and lowering the personal income tax, according to Bloomberg reports.
Slowing consumer spending isn’t the only headwind facing Alibaba. Tougher competition from its biggest domestic rival—JD.com—and upstart competitors such as Pinduoduo and Meituan Dianping also present challenges.
JD.com, whose revenues have increased more than 300 percent since 2014, is Alibaba’s most formidable competitor. Last month, JD.com rolled out its own logistics network in Shanghai, Guangzhou, and Beijing, allowing consumers and businesses to ship packages using its portal within the messaging app WeChat.
JD.com has a vastly different business model compared to Alibaba. While Alibaba generally sells products from affiliated merchants, JD.com controls its own inventory and delivery infrastructure, in a manner similar to Amazon.com.
The company’s Nasdaq-listed stock has also been battered this year, declining more than 50 percent to $24.05 from highs of $50.50 reached in late January.
Pinduoduo, which combines discount online retailing and social network, received fresh capital after raising $1.6 billion in a New York IPO in July. Pinduoduo, which has been growing rapidly, has about 195 million monthly users, according to TechNode, a China-based technology website.
As of this year, Alibaba has the biggest e-commerce market share at 58 percent, according to eMarketer. JD.com is second with 16.3 percent, while Pinduoduo is a distant third at 5.2 percent. Interestingly, both JD.com and Pinduoduo are backed by Tencent, one of China’s biggest internet companies.
“Stiffer competition means that Alibaba faces some hard choices,” Bloomberg’s Tim Culpan wrote in a Nov. 2 editorial. “It could keep pushing merchants to buy ads—which, in turns, spurs other merchants to buy ads just to keep up—and risk some sellers jumping ship altogether. Or it could dial back that dog-eat-dog competition and ensure e-tailers stick with them.”
Management’s decision to not maximize its ads meant that “It opted for the latter, betting that it will have a chance to hit them up later,” Culpan wrote.
For now, all eyes will be on Singles’ Day. No pressure, Alibaba.