Alibaba faces growth challenges amid tighter regulation of China’s domestic tech sector and a slowdown in the world’s second-largest economy. However, analysts believe the e-commerce giant’s growth could pick up throughout the rest of his 2022.
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Chinese tech giants Alibaba and Tencent often talk all about innovation and new products during earnings calls with investors.
But the second quarter was different. His two biggest tech executives in China focused on something less flashy: keeping costs down.
It comes after Alibaba and Tencent released a string of second-quarter results, confirming that these once bohemian and high-handed behemoths are no longer growing.
Alibaba, China’s largest e-commerce player, reported flat growth for the first time in the April-June quarter. On Wednesday, gaming and social media giant Tencent posted its first-ever year-over-year decline in quarterly revenue.
Alibaba and Tencent are feeling the effects of the coronavirus-induced economic slowdown in China, which has hit everything from consumer spending to advertising budgets. Tighter domestic technology regulations in areas ranging from antitrust to gaming over the past year and a half have also weighed on earnings.
As earnings continue to be squeezed, both giants appear to be more disciplined in their approach to spending.
“In the second quarter, we aggressively exited non-core businesses, tightened marketing spending and reduced operating expenses,” Tencent CEO Ma Huateng said on a conference call with analysts. “This has allowed us to progressively increase our revenues despite the difficult revenue situation.”
In fact, Tencent’s profit increased 10% from the previous quarter, excluding the impact of certain non-cash items and merger and acquisition transactions.
Tencent president Martin Lau said the company has exited non-core businesses such as online education, e-commerce and live-streaming games. The company has also tightened its marketing spending, cutting back on areas of low investment such as user acquisition. Tencent’s second-quarter sales and marketing expenses fell by 21% year-on-year.
Headcount at the Shenzhen-based company also fell by 5,000 compared to the first quarter.
James Mitchell, Tencent’s Chief Strategy Officer, said these initiatives and investments in new areas will enable the company to “return the business to year-over-year revenue growth, even in the current macro environment.” I can,’ he said. Revenue growth is flat.
Meanwhile, Alibaba flagged cost-cutting efforts earlier this year and continues to push ahead.
“We will continue to pursue our cost optimization and cost control strategies in the coming quarters and for the remainder of this fiscal year,” Alibaba Chief Financial Officer Toby Xu said on an earnings call earlier this month.
Xu said the Chinese e-commerce giant has “reduced losses” in some of its strategic businesses.
Where does growth come from?
Alibaba and Tencent have had to strike a delicate balance to convince investors that they are cutting costs while still investing in the future.
“For them to return [the] Revenue growth path, cost optimization alone is not enough. They need to find new growth drivers,” Winston Ma, adjunct professor of law at New York University, told CNBC in an email.
Alibaba is focused on strengthening its cloud computing business, which executives and investors in the field believe will be the key to Alibaba’s future profitability. Cloud was Alibaba’s fastest growing segment in June quarter earnings.
Meanwhile, Tencent said advertising on WeChat’s short-video feature could become a “substantial” revenue stream in the future. Tencent operates WeChat, China’s largest messaging app with over 1 billion users.
Chelsey Tam, a senior equity analyst at Morningstar, told CNBC that Alibaba will continue to focus on areas with “long-term potential,” such as cloud computing and international e-commerce. “For unprofitable businesses, we assess the costs and benefits.”
Morningstar Senior Equity Analyst Ivan Su said Tencent “has struck a good balance between long-term investment and short-term profitability.”
“If you look at the cost initiatives they have announced, some of the cuts will be permanent, such as moving to the cloud and closing unprofitable non-core businesses, while others will be permanent (cutting marketing budgets and hiring cuts). slowdown) is more temporary in nature, so there are multiple reductions, levers they can pull to create that kind of balance,” Hsu said.
