alibaba (BABA) and Tencent Holdings (TCEHY), two of China’s largest internet companies, have been reporting double-digit revenue gains for years. But now they’re sputtering amid multiple challenges that have plagued most internet stocks in the country.
Chinese companies face a confluence of threats to their businesses. They include a resurgence of Covid-19 shutdowns, cumbersome regulations, supply chain issues, higher logistics costs, currency depreciation, inflation and a downturn in real estate.
Moreover, these obstacles come amid 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 fell for the first time in five months and exports slowed, as did factory production growth.
The impact of these challenges was reflected in the quarterly results of Alibaba and Tencent last week. Both companies beat earnings expectations, but posted weak sales for the second quarter in a row.
Alibaba’s domestic e-commerce sales receipt
At Alibaba, revenue 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.
Worse still, Alibaba’s main domestic e-commerce unit saw sales fall 1% year-over-year. While user traffic remained stable during the quarter, purchase frequency declined.
Alibaba CEO Daniel Zhang said the state of the economy is the company’s most pressing issue.
“The macro environment would be the key determinant not just for Alibaba, but for all players in the consumer space, both online and offline,” he said during the company’s post-earnings conference call. The economy affects consumer confidence, demand and willingness to spend, Zhang said.
After closing its 11.11 Global Shopping Festival, known as Singles’ Day, on Nov. 11, Alibaba said the number of shoppers at that event dropped compared to last year’s event.
According to the Alibaba earnings reportBaird analyst Colin Sebastian lowered his Alibaba share price target from 140 to 120, but maintained his outperform rating.
“While we expect revenue headwinds to continue in the near term, largely at a macro level, we believe Alibaba has the potential to generate significant operating leverage as e-commerce and services growth accelerates,” Sebastian said in a note. to customers.
Tencent revenue declines in third quarter
Elsewhere among Chinese internet stocks, Tencent reported disappointing sales numbers for the third quarter. It said quarterly revenue fell 2% year over year to $19.7 billion. That follows a 3% decline in the previous quarter.
Tencent is closing a number of unprofitable businesses and laying off staff.
“While the macroeconomic environment remains challenging, our efficiency initiatives have enabled us to deliver slightly positive year-over-year earnings growth, a significant improvement over the past few quarters,” said Martin. Lau, president of Tencent, during a conference call.
Tencent is the world’s top 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 playing games.
Internet stocks pressured to divest stakes
With its earnings report, Tencent announced it will return most of its $22 billion stake in food delivery giant Meituan to investors through a dividend.
In March, Tencent also sold most of its stake in JD.com. It returned more than $16 billion in company stock to shareholders as a one-time dividend.
Alibaba has made similar divestments of investment interests. The divestments are the result of a series of devastating actions by regulators in Beijing starting in 2021. Those actions targeted the sprawling empires of these internet stocks, which in some cases displayed monopoly power.
Beijing also imposed restrictions on video game development, playing time and content, totally disrupting business models. That was especially detrimental to Tencent.
Other Chinese Internet Stocks Reporting
Chinese e-commerce company JD. com (JD), however, managed to break through the negative trends quarterly report. JD reported a double-digit gain in sales, up 11.4%, accelerating from 5.4% growth in the prior quarter.
Chinese internet stocks, among others, Baidu (BIDU) will publish quarterly results on November 22. Baidu offers various internet services, including China’s largest search engine.
Follow Brian Deagon on Twitter at @IBD_BDeagon for more information on technical stocks, analysis and financial markets.
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