Alibaba’s Slowing Sales Spook Investors Already On Edge Over Ant

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Asia’s largest corporation reported a 30% rise in sales in the September quarter, in line with expectations but down a tad from the previous three months. That did little to reassure investors worried about the tightening regulatory scrutiny that forced Jack Ma’s Ant Group Co. to call off its $35 billion IPO. Chief Executive Officer Daniel Zhang would only say it’s evaluating the impact on its business from more stringent rules governing its 32%-owned sister company.

Alibaba’s shares slid more than 4% in New York, extending a volatile streak that began with a $68 billion U.S. selloff. The company enjoys a close relationship with Ant, whose Alipay mobile wallet anchors the majority of Alibaba’s e-commerce transactions and whose microlending services drive consumption. In response to a question about the extent to which Ant loans lead to online shopping, executives said the company doesn’t quantify that traffic.

“As Ant Group’s major shareholder, Alibaba is actively evaluating the impact on our business in response to the recently proposed changes in the fintech regulatory environment, and will take appropriate measures accordingly,” Zhang told analysts on a conference call.

Read more: Inside the Chaotic Unraveling of Jack Ma’s $35 Billion IPO

Alibaba booked almost 4.7 billion yuan of profit from Ant in the September quarter, a big chunk of its overall bottom line. The e-commerce giant reported revenue for the three months ended September of 155.1 billion yuan ($23.4 billion), meeting the 154.8 billion yuan average of estimates. Profit fell 60% to 28.8 billion yuan from a year earlier, when it booked a one-time gain from the acquisition of its stake in Ant.

Alibaba had benefited from stronger sales in its home market, which had led the global recovery from Covid-19. Gross domestic product grew 4.9% last quarter, making China the world’s only major growth engine. The e-commerce titan is banking on more than a quarter of a million brands, increased discounting and technologies like livestreamed selling to draw consumers to its annual blockbuster Single’s Day shopping festival, which culminates next week.

“The performance of Singles Day might be a more important benchmark to look at, rather than the third quarter result,” said Steven Zhu, an analyst with Pacific Epoch. “E-commerce is the only sector that will actually benefit from coronavirus, simply due to the fact that a lot of normal consumption is shifted from offline to online.”

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Alibaba’s shares have gained roughly 60% from their Covid-19-era lows in March and touched a record high in October when Ant priced its IPO. Retail and institutional investors had flocked to the record $35 billion-plus IPO, betting that Ant will overcome high valuations, regulatory headwinds and rising competition to reshape the future of global finance.

Alibaba’s core commerce business should expand at a compound annual growth rate of 23% from 2021 to 2023, CGS-CIMB analysts including Lei Yang wrote. Growing regulatory scrutiny over Ant’s lending business shouldn’t exert a great impact on Alipay, they wrote.

What Bloomberg Intelligence Says

Alibaba may continue to benefit from accelerated user and merchant adoption of online grocery shopping, cloud computing and remote-work applications, driven by China’s Covid-19 outbreak. Its domestic retail marketplaces have fully recovered from the pandemic. Longer-term sales and profit growth could be driven by global expansion and the monetization of newer business segments such as logistics, media and entertainment.

— Vey-Sern Ling and Tiffany Tam, analysts

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Revenue for Alibaba’s cloud division jumped 60% in the quarter, driven by demand from customers in the internet, finance and retail industries. The unit is forecast to turn profitable for the first time ever in the year ending March, Chief Financial Officer Maggie Wu said earlier. That will be a milestone for the decade-old business, which competes with the likes of Amazon (NASDAQ:AMZN) Web Services, Microsoft Corp (NASDAQ:MSFT). and Google (NASDAQ:GOOGL) globally and is fending off upstarts like Tencent Holdings (OTC:TCEHY) Ltd. at home.

To capitalize on the boom in online groceries, Alibaba last month paid about $3.6 billion to double its stake in Sun Art Retail Group (OTC:SURRY) Ltd., taking control of one of China’s largest hypermarts to try and fend off rivals like JD (NASDAQ:JD).com Inc. Other competitors are also challenging Alibaba’s pole position, ranging from upstart Pinduoduo (NASDAQ:PDD) Inc. to Tencent-backed Meituan.

Read more: Magic Johnson Selling Gels Shows U.S. Brands Flocking to Alibaba

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