Alibaba earnings top expectations but coronavirus is having a ‘negative impact’ on the business
Shares of Alibaba Group Holding Ltd. fell Thursday, after the company posted better-than-expected results for its fiscal third quarter but discussed how the recent coronavirus outbreak in China was having a “negative impact” on the company’s commerce business in the current period as packages aren’t getting delivered on time.
The company posted net income of 52.3 billion Renminbi ($7.5 billion), or RMB19.55 a share, up from RMB33.1 billion, or RMB12.64, in the year-earlier period. Adjusted earnings per share rose to RMB18.19 from RMB12.19 and came in above the FactSet consensus, which modeled RMB15.91.
Alibaba’s BABA, -1.52% revenue for the quarter increased to RMB161.5 billion, up from RMB117.3 billion a year earlier. The FactSet consensus was looking for RMB159.7 billion. The Chinese e-commerce giant’s cloud business topped RMB10 billion in quarterly revenue for the first time.
The company’s report comes after numerous companies warned about anticipated negative impacts from COVID-19, the disease brought on by the novel coronavirus that is believed to have originated at a food market in Wuhan, China late last year.
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The stock fell 2.0% in morning trading.
Alibaba disclosed on its earnings call that the company is continuing to experience challenges stemming from the outbreak as there’s been a delay in employees’ return to work after the Lunar New Year holiday. This is having a negative impact on the ability for merchants and logistics companies to resume business as usual, Alibaba’s management disclosed.
“Our overall revenue growth rate, we believe, will be negatively impacted for the March quarter,” Chief Financial Officer Maggie Wu said, based on what the company has seen since the start of February. She noted that business units like Alibaba’s China retail marketplace and local consumer services might see negative revenue growth as a result of the disruptions but that it was difficult to give a broad financial projection given that the March quarter is only halfway over.
For context, Alibaba’s China retail marketplace business grew 36% in the latest quarter, before companies started to feel an impact from the coronavirus, while revenue from local services increased 47%. The fact that Alibaba anticipates that there could be negative revenue growth in these categories this quarter “shows the impact of the virus,” Neuberger Berman senior research analyst and tech portfolio manager Hari Srinivasan told MarketWatch.
“There’s demand but when you have large cities and areas that have travel bans, that’s going to have an impact,” Srinivasan said. The issues seem to be largely supply-based, which is encouraging for Alibaba’s long-term prospects, he said, as management cited increasing demand for digital services.
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Management hinted that the challenges brought on by the COVID-19 outbreak could prompt long-term behavioral changes from Chinese consumers and businesses. Alibaba is seeing that more consumers are ordering groceries from their homes and more employees are choosing to work from home, two trends that Alibaba plays into through its various service offerings.
“I think after all is done, I would expect that this is an inevitable trend that more and more businesses and more and more customers will have a digital life or digital working style,” Chief Executive Daniel Zhang said.
Prior to the report, Alibaba detailed some of the ways the company was working to help facilitate business and commerce in China as the outbreak continued to disrupt some of the country’s business activity. Alibaba said it would be reducing or lowering some fees, enabling enterprises to use its work-from-home platform for free, and helping to subsidize couriers so that they would receive extra money for their work.
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Outside of the coronavirus discussion, management talked about how Alibaba is trying to balance investment spending with operational improvements in its core-commerce segment.
“Compared to a year ago, we have increased adjusted [earnings before interest, taxes, and amortization] by RMB12 billion in absolute dollar amount while the combined losses in our four strategic areas were all flat year over year,” Wu said. “This reflects our targeted approach to allocation of resources and investment in key strategic growth areas while also optimizing [cost of goods sold] and their improving efficiency.”
Alibaba “let the leverage from its commerce business flow through,” Neuberger Berman’s Srinivasan said. He had been expecting an increase in investment spending and was impressed that Alibaba’s investments seem to be paying off by allowing the company to benefit from scale in massive markets.
Srinivasan was also encouraged by the company’s momentum in lower-tier Chinese cities as the company pointed out that more than 60% of new average annual customers came from less-developed regions in China. Annual active customers totalled 711 million as of the end of 2019.
Shares of the Chinese e-commerce giant have shed naerly 5% over the past month, though they’ve climbed 20% over the past three months. The KraneShares CSI China Internet ETF KWEB, -1.93% has added 15% in a three-month span and the S&P 500 indexSPX, -0.36% has gained nearly 9%.
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