Alibaba s Revenue Growth Surpassed The Expectation But The Loss Caused By Cainiao Remains A Landmine

(Chinese Version)

On Thursday, Alibaba Group released its 2017 Q1 Fiscal Report (companies have different standard for quarterly fiscal report: at present Apple has made its Q3 report available already, one quarter ahead of the actual time; Alibaba Group’s fiscal report Is the financial performance of the company in the second quarter in 2016). The report shows that the company has made a revenue of ¥32.154 billion in Q2 in 2016, a 59% year-on-year growth, while the net income is ¥7.142 billion, a 77% slump compared with last year.

The fact that the actual financial performance surpassed analysts’ expectation made Alibaba’s stock price surge by 12% in just two days. However, according to Wallstreet Journal, loss brought by some sub business lines of Alibaba is posing a threat to the company.

Alibaba’s revenue growth surpassed the expectation but risks still lurk in the company’s new business lines

The latest fiscal report of Aliababa is probably is the most satisfying one in the company’s history after going public. Its revenue and net profit all surpassed the estimates made by the analysts at the Wall Street and it in fact assured some investors that the Chinese Internet giants is not affected by the impact brought by the slowing down national economy on the e-commerce industry, which is reflected by the rising stock price that surged for two days. Alibaba’s stock price not only rose to the peak in 52 weeks and back to above $90, making the company’s valuation as high as ¥245.16 billion.

Alibaba’s latest quarterly report for the very first time shows statistics in four business lines, in response to American investors’ demand. Alibaba revealed in its fiscal report of May that SEC would conduct investigation on some of its accounting report, and therefore the fiscal report this time make statistics of its new businesses public, allowing investors at the Wall Street to know more about the financial condition and performance of the company. However, Alibaba hasn’t updated any information on the investigation process of the SEC.

The statistics released by Alibaba on Cainiao include the daily volume of handled packages (4,200) and the loss etc. Alibaba holds 47% of Cainiao’s stocks. Alibaba’s previous fiscal reports failed to tell the investors about the operation performance of Cainiao and Alibaba has been heavily criticized for it. The investors believe that Alibaba brings a great deal of logistics opportunities to Cainiao and Alibaba’s inability to include these statistics in the fiscal report makes the report inaccurate. Cainiao’s financial consolidation is also an important direction of SEC’s investigation.

The four business lines on Alibaba’s latest fiscal report are: e-commerce, cloud computing, media and entertainment, new projects and invested businesses. Alibaba’s main business the e-commerce business remains the leading giant in China. It has not only amassed an excellent sales volume growth, its user base continues to grow as well despite the fact that the Internet user base in China is saturating. However, Alibaba also admits that company has encountered fierce competition in the e-commerce industry.

Alibaba believes the biggest show point on the fiscal report is the cloud computing service line as it made a revenue of $187 million, a 156% year-on-year growth.

According to Alibaba, the cloud business is the company’s powerful growth engine. It’s said that the company would compete with mainstream cloud companies in the future. Looking from statistics on growth, it’s apparent that the cloud computing business is actually doing better than the e-commerce business.

However, Alibaba’s cloud computing business is still a rookie in the international market. At present, Amazon is the world’s top leader in the cloud computing business. The company’s Q2 fiscal report, released in late July, shows that Amazon Web Services amassed a revenue of $2.886 billion, winning a profit of $718 million.

The growth of the media and entertainment business is also eye-catching, reaching the number of ¥3.135 billion, a year-on-year growth of 286%. However, it’s a result of adding YoukuTudou into the calculation.

Alibaba is honest about the negative impact and losses brought by new business lines and acquired businesses. The losses listed in the fiscal report are as follow, partially:

1. The operation of the cloud computing business: ¥439 million

2. The operation of the media and entertainment business: ¥1.853 billion

3. The operation of new projects and other invested business lines: ¥1.572 billion

In other words, the e-commerce business remains the main business drive in the four major business lines of the company as it continues to provide subsidy for other losing business lines. It should be noted that the cloud computing business has the most potential to achieve break even in the future.

Losses brought by invested businesses:

Logistics platform Cainiao Network: $34 million

Takeout service platform: $37 million

All non-e-commerce sub-business lines Had brought a total loss of $530 million, pretty much 21% of the revenue of the e-commerce business lines. Amazon’s experience has proved that if Alibaba could build new growth engines through investing in sub-business lines the investment market would be more accepting.

Alibaba faces great pressure in the future as it aims to finish the transformation process before the growth of its e-commerce business starts to slow down

Since the revenue is indeed growing as a whole, so far investors could ignore the losses mentioned above. However, if the growth of e-commerce business also starts to slow down, things will be entirely changed.

The latest fiscal report from Alibaba will be the last quarterly report on GMV and in the future statistics on GMV will be revealed on the annual fiscal report. GMV has been considered by investors as the key indicator that confirms growth. For example, the daily transaction volume on the Double Eleven Festival is part of the statistics. SEC is also researching on the statistics from the Double Eleven Festival last year.

Alibaba’s CFO Wu Wei stated that nowadays GMV is no longer the key indicator that assesses performance, and that releasing the GMV statistics annually instead of quarterly can avoid causing unnecessary doubts among the investors and potential legal issues. On the other hand, the fact that Alibaba aims to become a tech giant instead of an e-commerce giant like Amazon also plays an important role in this process.

Besides its e-commerce businesses, Alibaba holds complex shares in companies from many different fields. After Alibaba ultimately went public on the American stock market, companies that has been invested by Alibaba are under constant supervision of the SEC. As a renowned tech company, it’s quite impossible for Alibaba to make a false fiscal report otherwise the cost will be extremely high.

The Wall Street has a theory believes that the slowing down Chinese economy would bring a great impact to e-commerce platforms like Alibaba. Even though so far looking from Alibaba’s fiscal report the company is seemingly doing great, such theory still spreads among investors. Alibaba needs to build a new business line that can drive the company’s growth forward before this theory does come true.

The release of Cainiao’s fiscal statistics is only a result of Alibaba’s complex investment structure. Foreign investors believe that Alibaba in fact holds over 47% of shares of Cainiao through cross-shareholding. Although loss caused by Cainiao doesn’t bring much of an effect on Alibaba’s revenue performance as a whole, still if similar companies’ performance is also added into the calculation on the fiscal report, Alibaba would face greater challenge as the growth of its main businesses starts to slow down while the new businesses still lack traction.

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[The article is published and edited with authorization from the author @Wen Gengmiao, please note source and hyperlink when reproduce.]

Translated by Garrett Lee (Senior Translator at PAGE TO PAGE), working for TMTpost.