A staff member wearing a uniform featuring the logo for Ant Financial Services Group’s Alipay, an affiliate of Alibaba Group Holding Ltd., stands during a campaign event in Tokyo, Japan. (Photographer: Shiho Fukada/Bloomberg)

China’s Tech Giants Are Looking Weaker Than Ever

(Bloomberg Opinion) -- China’s internet sector wrapped up third-quarter earnings season with its slowest growth on record.

Aggregate revenue for the five largest companies climbed 31.5 percent for the three months ended September, the third consecutive quarter of slowdown.

That doesn’t look too shabby. Any company or industry that manages to sustain such numbers for any period of time shouldn’t be easily dismissed.

But there are increasing signs that even this slower rate is flimsy. That’s because profits are actually dropping.

I analyzed the top companies by market cap: Baidu Inc., Alibaba Group Holding Ltd., Tencent Holdings Ltd., JD.Com Inc. and NetEase Inc. Neither Meituan Dianping or Pinduoduo Inc. was included because of their shorter earnings track records.

China’s Tech Giants Are Looking Weaker Than Ever

For the September period, aggregate operating income fell 0.3 percent, after plunging 24 percent in the June quarter. Tencent was the only one that posted higher operating income, and even that’s misleading because 31 percent of its profit came from gains beyond its core business.

China’s Tech Giants Are Looking Weaker Than Ever

That tells us it’s time to look past those stellar top-line numbers and drill down. Revenue growth isn’t worth much if profit margins keep shrinking. That’s exactly what happened in the most recent two quarters, with September’s uptick being overstated due to Tencent’s one-time gains.

China’s Tech Giants Are Looking Weaker Than Ever

There was a time when companies could get away with sacrificing margins in return for revenue growth. The thinking was that this could buy market share and loyalty. In startup parlance it’s known as “building a moat.” 

This strategy no longer works. When profits are declining simply to prop up revenue growth, things have gone too far.

China’s internet giants are grown-ups now. It’s time they started acting like it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

©2018 Bloomberg L.P.