Alibaba Group Holding (BABA) shares lurched 4.0% lower in Hong Kong trading on Friday, after the company's efforts to build business in cut-price group buying caused profit margins to slip, and miss estimates.
The Chinese e-commerce giant is investing heavily in Taobao Deals and its new community-grocery business, in which buyers group together to order goods at a discount. Management said in reporting earnings on Thursday that the company will invest all its incremental profits from fiscal 2022 back into "new retail" and those strategic areas of growth.
It's a risky strategy, but Alibaba will be counting on its size making the difference. Bulk buying is a crowded field in China, where rivals such as JD.com (JD) and Meituan (MPNGY) are also burning cash to build business. The return is unsure.
The "fundamental credit question for investors is whether this is the beginning of an explosive new market, or a fad that will lead to diminished margins and wasted capital," S&P noted in a January report on community buying when the trend took off.
It is a sign of just how successful Alibaba is that these earnings are considered a disappointment. March-quarter revenue rose 64% to C¥187.4 billion (US$28.6 billion), beating consensus estimates by 4%. The company predicts sales will rise another 30% in the year ahead, to C¥930 billion (US$144 billion) for the 12 months through March 2022.
That would be startling growth for most companies. But the market is looking at the overall profit margin of 12%, which fell 5 percentage points, and missed estimates by 1.7 percentage points.
Alibaba also recorded an operating loss for the first time since it went public in 2014, thanks to a a record US$2.8 billion fine in China for monopolistic behavior. That's a one-off, though, which caused a loss from operations of C¥7.7 billion (US$1.2 billion) for the March quarter. Investors can now look beyond that penalty, caused by practices such as the "Pick One From Two" policy of forcing major brands to offer goods exclusively on the Alibaba platform.
There's no doubt it has been a dark 12 months for Alibaba shares, which have normally lit up portfolios. They have fallen by one-third from a record high in late October, leaving them at much the same price as they were a year ago. October was also the fateful month when company figurehead Jack Ma took to the stage at a financial conference in Shanghai and criticized China's financial regulators and system as antiquated and small-minded.
The stock actually jumped 8.5% in mid-April after Chinese regulators levied the record fine on Alibaba. The shares bounced then because the fine removed an overhang from the company. It was also eminently payable out of Alibaba's US$51.7 billion cash balance. At 4% of total revenue in China, it could have been worse, as high as 10%.
Alibaba's share fall was at odds with a strong day for shares in general in East Asia, building on U.S. gains the day before. The Hang Seng benchmark in Hong Kong rose 1.1%, while mainland shares advanced 2.4% in the form of the CSI 300 index of the largest Shanghai and Shenzhen stocks. The broad-market Topix index in Tokyo added 1.9%.
The March quarter now being reported also represents the end of Alibaba's fiscal year. Chairman and CEO Daniel Zhang championed the "historic milestone" of moving past 1 billion annual active consumers worldwide for the first time. Total gross merchandise volume reached US$1.2 trillion.
The Taobao Deals business is booming. Total monthly active customers moved past 150 million in the March quarter, up some 50% from the 100 million for the three months through December.
"Community buying" took off during the COVID-19 pandemic, when grocery stores temporarily closed and shoppers were looking to avoid close confines. Groups of consumers appoint a leader to choose items and take delivery, something proving particularly popular in smaller and poorer cities.
S&P estimates community buying hit C¥130 billion (US$20.2 billion) in 2020. That is still a small fraction of the overall C¥39 trillion (US$6.1 trillion) online spend in China. But bulk buying is likely to grow 50% to 60% in 2021, the rating agency predicts. It may also help companies shift grocery spending online in China, which is a US$770 billion industry.
The question is whether Alibaba will gain by betting big to cater to discount-seeking, less-wealthy shoppers. Community buying has been described as the "most heated battleground in the entire Internet space" by Nomura's China Internet analysts. China has a history of companies overcrowding into the exact same space, discounting heavily to build business as fast as possible. Inevitably, there's a crash when the cash burns out.
Meituan, which started out as a grocery-delivery specialist, is already active with bulk buying in 2,000 cities. Pinduoduo (PDD) has also been an early mover in that retail segment. JD.com is investing heavily to catch up, and will likely eke out a slim 1.7% net profit margin this year due to that spending.
Alibaba, of course, has the deepest pockets in China. It generated a loss of C¥13.7 billion, up 113% in a year, from investment into new businesses, mainly Taobao Deals, bulk buying and "new retail."
Management now says it will reinvest all its incremental profits from the year ahead through March 2022 into those new business lines, including community-grocery buying. That will likely produce flat earnings for the next fiscal year, whereas Nomura's analysts originally anticipated a 10% increase. The gap would represent Alibaba investing additional funding of C¥20 billion (US$3.1 billion) in those new business lines.
