Alibaba Earnings: New Business Slowdown Is a Concern
(Bloomberg Gadfly) -- Alibaba Group Holding Ltd.'s numbers were impressive enough, I suppose.
Both revenue and earnings surpassed estimates, which is nothing to sneeze at, but that's become par for the course. Looking at the various divisions, though, it doesn't seem there's much progress at all over the past year.
Core commerce remains quite solid, but it's the new areas that remain a drag and suddenly don't look quite so exciting -- certainly not to the extent you'd expect from money-burning operations.
For the second straight quarter, two of Alibaba's quick and nimble businesses -- digital and media entertainment, and innovation initiatives -- grew at a slower pace than the old giant of core commerce.
Take the former, which is spending money on content and marketing to lure eyeballs. Revenue growth was just 33 percent for the period. It may be harsh to call this slow, but that's the second straight quarter where sales were in the 30's percentage-wise, instead of the 200's, while operating income isn't really on the mend. It's a similar story for innovation initiatives, where revenue climbed 27 percent, though I'm inclined to be more forgiving since that's a unit building longer-term products like car-navigation systems. Sales for core commerce, by comparison, shot up 63 percent for the quarter.
CFO Maggie Wu told investors that the rising cost of revenue is necessary because they're putting money into areas with potential for growth. But such investments are starting to show diminishing returns on growth.
Investors have so far shown patience toward Alibaba and its continued losses in these new areas. The stock's doubling in value this year shows they're not too worried about a few hobby horses when the stallion keeps winning. But at some point that stable of new businesses is going to have pay their way, especially when core commerce faces an inevitable slowdown. The longer that takes, the more likely investors' reservoir of goodwill shall run out.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.
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