Internet Stocks In China Struggle Amid Challenges

Alibaba (BABA) and Tencent Holdings (TCEHY), two of China’s largest Internet companies, have reported double-digit gains in revenue for years. But now they are sputtering amid multiple challenges that have bedeviled most internet stocks in the country.




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The Chinese companies face a convergence of threats to their businesses. They include a recovery from Covid-19 shutdowns, burdensome regulations, supply chain difficulties, higher logistics costs, currency depreciation, inflation and a real estate foreclosure.

Moreover, these obstacles come in the context of a deteriorating economy at home and abroad. China’s National Bureau of Statistics reported last week that economic activity cooled in October. Retail sales unexpectedly contracted for the first time in five months and exports slowed, as did factory production growth.

The impact of these challenges showed in the quarterly earnings reports of Alibaba and Tencent this past week. Both companies beat expectations on earnings, but posted a weak earnings performance for the second quarter in a row.

Alibaba’s Domestic E-Commerce Sales Slip

At Alibaba, revenues rose just 3% to $29 billion in the September quarter. That came after it reported flat sales, for the first time, in the previous quarter.

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Worse, Alibaba’s core, home e-commerce unit saw a 1% year-over-year decline in sales. Although user traffic remained stable during the quarter, purchase frequency decreased.

Alibaba Chief Executive Daniel Zhang said that the state of the economy is the company’s most pressing problem.

“The macro environment would be the primary determinant not just for Alibaba, but for all players in the consumer space, online and offline,” he said at the company’s post-earnings conference call. The economy affects consumer confidence, demand and willingness to spend, Zhang said.

After Alibaba concluded its 11.11 Global Shopping Festival, known as Singles’ Day, on November 11, it said that the number of shoppers during that event decreased compared to last year’s event.

After Alibaba’s earnings report, Baird analyst Colin Sebastian lowered his price target on Alibaba shares to 120 from 140. However, he maintained his outperform rating.

“While we expect revenue headwinds to continue in the near term, mainly macro in nature, we believe Alibaba has the potential to generate significant operating leverage when e-commerce and services growth accelerates,” Sebastian said in a note to customers.

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Tencent revenue falls in the third quarter

Elsewhere among China Internet stocks, Tencent reported disappointing sales figures for the third quarter. It said quarterly revenue fell 2% year over year to $19.7 billion. This is a decrease of 3% in the previous quarter.

Tencent is in the process of shutting down some unprofitable businesses and laying off staff.

“While the macro environment is still challenging, our efficiency initiatives have enabled us to achieve slightly positive year-on-year growth in profit, which represents a significant improvement over the past quarter,” said Tencent President Martin Lau on a conference.

Tencent is the world’s largest video game maker and the owner of the popular super-app WeChat. The app is used for messaging and financing, as well as social media interactions and gaming.

Internet stocks pressured to divest holdings

With its earnings report, Tencent announced that it will distribute most of its $22 billion stake in food delivery giant Meituan to investors, through a dividend.

In March, Tencent also divested most of its holdings in JD.com. It distributed more than $16 billion in company stock to shareholders as a one-time dividend.

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Alibaba has made comparable sales of investment stocks. The distributions are the result of a series of sweeping curbs by Beijing regulators that began in 2021. These actions targeted the sprawling empires of these Internet stocks, which in some cases displayed monopoly power.

Beijing has also placed restrictions on video game development, playtime and content, disrupting entire business models. That was particularly damaging for Tencent.

Other China Internet Stocks Reporting

China e-commerce company JD.com (JD) however managed to buck the negative trends with its quarterly earnings report. JD reported a double-digit gain in revenue, up 11.4%, accelerating from growth of 5.4% in the previous quarter.

Among other China Internet stocks, Baidu (BIDU) will report quarterly results November 22. Baidu offers various Internet services including China’s largest search engine.

Please follow Brian Deagon on Twitter @IBD_BDeagon for more on tech stocks, analytics and financial markets.

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