Internet Stocks In China Struggle Amid Challenges

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




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The Chinese companies are confronting a convergence of threats to their businesses. They include a resurgence of Covid-19 shutdowns, burdensome regulations, supply-chain woes, higher logistics costs, currency depreciation, inflation and a real-estate downturn.

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

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

Alibaba’s Domestic E-Commerce Sales Release

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

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

Alibaba Chief Executive Daniel Zhang said 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 the players in the consumption space, both online and offline,” he said on the company’s post-earnings conference call. The economy impacts consumer confidence, demand and willingness to spend, Zhang said.

After Alibaba wrapped up its 11.11 Global Shopping Festival, known as Singles’ Day, on Nov. 11, it said the number of buyers during that event declined compared to last year’s event.

Following the Alibaba earnings report, Baird analyst Colin Sebastian lowered his price target on Alibaba stock to 120 from 140. However, he kept his outperform rating.

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

Tencent Revenue Drops In Third Quarter

Elsewhere among China internet stocks, Tencent reported disappointing sales figures for the third quarter. It said quarterly revenue dropped 2% year over year to $19.7 billion. That follows a 3% drop 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 enabled us to achieve slightly positive year-on-year growth in profits, representing a significant improvement over the last few quarters,” Tencent President Martin Lau said on a conference call.

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

Internet Stocks Pressured To Divest Holdings

With its earnings report, Tencent announced it will distribute most of its $22 billion stake in meal 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 shares of the company to shareholders as a one-time dividend.

Alibaba has made comparable divestitures of investment stakes. The divestitures are the result of a series of withering curbs by Beijing regulators starting in 2021. Those actions took aim at the sprawling empires of these internet stocks, which in some cases displayed monopoly power.

Beijing also put restrictions on video-game development, play time and content, altogether disrupting business models. That was particularly harmful to 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 on Nov. 22. Baidu offers various internet services including China’s largest search engine.

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

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