Yahoo Finance Alibaba Falters Again While Tencent Builds on Its Recovery
(Bloomberg) -- Tencent Holdings Ltd. reported a far better-than-projected 62% surge in earnings while rival Alibaba Group Holding Ltd.’s profit plunged, highlighting the growing divergence between China’s twin internet powerhouses during a rocky post-Covid recovery.
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Alibaba’s net income tumbled 86% after an unexplained writedown for losses in its publicly traded holdings, which include companies from AI firm SenseTime Group Inc. to brick-and-mortar chain Sun Art Retail Group Ltd. That came on top of heightened spending to ward off up-and-coming competitors. US-held shares were down more than 7% at 10:15 a.m. in New York.
China’s two internet pioneers reported financial results on the same day — a rarity that put their contrasting fortunes into particularly stark relief. Both reported better-than-expected single-digit revenue growth, even as their profit performance diverged.
Investors are increasingly attuned to bottom line results now that the world’s No. 2 economy is emerging from Covid-era curbs and a sweeping crackdown on Big Tech. Tencent’s market valuation had reached $460 billion even before the latest results, while Alibaba had slid to about $205 billion.
“Tencent isn’t under the same competitive assault as Alibaba. But they are successfully growing advertising revenue in the new areas that will matter most,” said Jeffrey Towson of Techmoat Consulting.
Tencent, the operator of China’s ubiquitous WeChat social media gargantuan, showed how its TikTok-style video accounts service is gaining traction against ByteDance Ltd. Users spent 80% more time on WeChat’s video accounts, a nod to efforts to wrest engagement from its social media rival. That helped drive a 26% rise in ad sales.
Twinned with cost cuts, growth in advertising and cloud services helped it reach the best gross margin since 2016 even as the topline plateaued. Shares in Prosus NV — a proxy for Tencent’s stock after trading hours — rose more than 3.7%.
Alibaba grew revenue slightly faster — 6.6% versus Tencent’s 6%. But its net income was far worse than anticipated and even on an adjusted basis, before interest, taxes, depreciation and amortization, earnings slid 4%.
Neither company — two of the best barometers for consumer health — offered investors strong reassurances about the plight of China’s economy, which has struggled post-pandemic. Consumers remain cautious during a property meltdown and persistent youth unemployment, while the economy is slipping deeper into deflation, reflecting anemic domestic demand.
Alibaba Chairman Joseph Tsai said there were early positive signs that consumers were willing to spend again, though the market needed to “wait and see” on the domestic economy’s recovery.
“Nothing incrementally positive came out for Alibaba, whereas companies like Sea Ltd. and Tencent both came out strong,” said John Choi at Daiwa Capital Markets.
Both companies still have a plethora of issues to address.
In Alibaba’s case, the company has just embarked on a turnaround intended to leave behind a years-long regulatory crackdown that kneecapped much of its business.
Chief Executive Officer Eddie Wu and Tsai, longtime lieutenants of Jack Ma who took the helm from Daniel Zhang in September, have nixed major initiatives conceived under the former chief, including a listings of logistics arm Cainiao and the $11 billion cloud unit. They’ve decided to refocus on what they dubbed the customer experience and innovation. On the cloud front, the once-promising division is slashing prices to regain clients from state-backed companies such as China Telecom Corp. and the likes of Huawei Technologies Co.
Ma weighed in on Alibaba’s turbulence last month, with a rare memo aimed at shoring up sagging morale among the company’s 200,000-plus employees. He emphasized that growth was returning at the company, despite its recent flip-flops, while acknowledging past mistakes.
At Tencent, the games division remains in search of its next big hit, after years of regulatory tightening that cut play times and slowed development. Its new mobile release Dream Star hasn’t yet unseated NetEase Inc. as the leader in the fast-growing genre of party royale games — casual titles intended for group play. Tencent fast-tracked the Chinese debut of Dungeon & Fighter Mobile to this month, and executives hope the strong player spending at the start of the year could pave the way for the games business to return to growth from the second quarter.
Beyond China, Tencent’s Supercell will soon launch its first new game in five years. Before that, its biggest revenue driver was an updated version of the aging mainstay Brawl Stars.
“Tencent has found a sweet spot with WeChat video accounts. Even though gaming is weak, the advertising business is doing just fine,” said Shawn Yang, an analyst with Arete Research. “Alibaba is still early in the investment phase, with various organizational changes and competition with Pinduoduo on their mind. It has shifted its strategy from prioritizing merchants to prioritizing users — which requires money.”
--With assistance from Vlad Savov, Jane Zhang, Debby Wu, Henry Ren and Sabrina Mao.
(Updates share price in the second paragraph.)
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