Alibaba’s Lost Magic Is a Warning for the Future

(Bloomberg Opinion) -- Although it’s not surprising that China’s Alibaba Group Holding Ltd. has joined a long list of global consumer companies that took a hit from the Covid-19 pandemic, the details of its March-quarter earnings indicate that its struggles may not be over after the crisis subsides.

Consider online commerce, which investors might expect to benefit from customers being stuck at home. In fact, commissions dropped while ad revenue climbed, with a net result of just 2% growth in a sector that counts for around half of annual sales. Counterintuitively, the consumer segment that did manage solid growth was its physical retail businesses such as groceries.

Then there’s those hot new areas that should enjoy strong demand from the stay-at-home economy.

Cloud computing is the obvious beneficiary. Companies, consumers and educators have been rushing to online solutions to fill in for in-person events. At Alibaba, that business climbed 58% from a year earlier. That sounds like a huge number but is in fact the slowest level in at least two years. Rather than drive growth, the pandemic seems to have hindered it.

This matters because Alibaba is doubling down on cloud computing in recognition of that sector’s future prospects and is absorbing continued losses. If it’s unable to leverage such an opportunity, then other challenges including competition and regulation pose potential headwinds.

Another supposed opportunity comes from digital media and entertainment, which includes streaming service Youku, Alibaba Music and TMall TV. Collectively, this category climbed a mere 5% for the quarter and only 12% for the year and remains the single biggest drag on earnings. If growth is stalling, even as consumers are stuck at home and well before break-even, then investors have to wonder how long Alibaba is going to let this business burn a hole in the earnings statement.

It’s easy to dismiss all these items as one-offs, ready to be overcome once sunny skies return. Yet the macro picture for Alibaba is not rosy. Growth is slowing everywhere. Active annual consumer numbers climbed a mere 2.1%, and China’s government earlier Friday scrapped its annual GDP target, an admission that the broader economy is going to suffer.

Although investors want to believe that China’s rapid return to work will be like a wave of the wand for its tech titans, Alibaba is no magician.

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.

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