BEIJING - After pulling off the largest share offering in history, Alibaba has raised expectations through the roof.
The Chinese e-commerce group came close to meeting them on Tuesday with quarterly results - its first as a public company - revealing a 54 per cent annual growth in revenue. That may justify the 50 per cent run up in its shares since September. But profitability has slipped, and the company's explanation doesn't offer much comfort.
Alibaba is mostly moving in the right direction. It is squeezing more out of mobile consumers, who now account for 36 per cent of its transactions, and keeping 1.87 per cent of what they spent on its sites. That's up from 1.49 per cent in June, and makes a slight fall in the company's take from desktop users easier to bear.
Alibaba's Amazon-like Tmall site is also growing at twice the speed of consumer-to-consumer site Taobao. That's encouraging, since suppliers who sell on Tmall pay more than those on its more down-market sibling.
Lift up the hood, though, and things look less reassuring. Alibaba's operating margins fell from 43 per cent in June to 26 per cent, their lowest in three years after stripping out a one-off payment to shareholder Yahoo in 2012. Much of the drop came from equity given to retain employees after the initial public offering. But even under the company's preferred earnings measure, which excludes stock payments, net profit margins fell 5.9 percentage points.
One reason is that Alibaba spent more on promotion. Another is that new investments in things like web browsers and car navigation systems boost growth but bring lower returns than the core business. They're reminiscent of the zealous investments that dragged down earnings for the likes of Facebook and Amazon. The Chinese group has wide margins to play with, but also masses of cash to fritter: US$14.4 billion (S$18.5 billion) at the end of September.
Alibaba says its goal is to attract customers and make them spend more, rather than to increase profits or monetisation rates. But that in itself could be a problem. It makes buying sales growth at the expense of earnings too tempting. Moreover, it's a reminder that, in the Alibaba hierarchy, shareholders follow customers and employees. Investors may tolerate that while top-line growth is rapid, but they ought not forget it.
CONTEXT NEWS
Alibaba on Nov. 4 reported revenue of 16.8 billion yuan (S$3.4 billion) for the three months ended Sept. 30, a 53.7 per cent increase over results for the same period a year earlier. The Chinese e-commerce group's operating income fell 17 per cent to 4.3 billion yuan, due in part to a 3 billion yuan share-based compensation expense.
Total transactions through the company's Chinese retail sites hit 556 billion yuan, a 48.7 per cent year-on-year increase. That resulted in a monetisation rate of 2.3 per cent. Alibaba's revenue comes mainly from commissions it charges buyers and advertising fees.
Mobile transactions made up 36.8 per cent of the total processed in the three-month period, compared with 14.7 per cent for the same quarter a year earlier. The percentage share Alibaba keeps from mobile transactions increased from 1.49 per cent to 1.87 per cent over the quarter.
Alibaba completed an initial public offering in New York on Sept. 19. The company's shares closed at $101.80 on Nov. 3, compared with an IPO price of US$68, giving the company a market capitalisation of US$256 billion.