Alibaba's Growth Slows as Chinese Economy Weakens

Rival Tencent Also Saw Slower Growth, Though Its Ad Revenues Were a Bright Spot

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Quarterly revenue growth slowed for China's e-commerce giant.
Quarterly revenue growth slowed for China's e-commerce giant. Credit: Andrew Harrer/Bloomberg

Alibaba Group's quarterly sales rose at the slowest pace in at least three years amid a weakening Chinese economy.

Revenue rose 28% to $3.2 billion in the three months ended June, down from an average of 56% in the previous 12 quarters. The Chinese internet and e-commerce giant also announced plans to buy back $4 billion of stock.

The slowing growth stems from e-commerce market saturation in China's larger, wealthier cities and the company's strategy of shifting to services over smartphones and tablets, which generate less revenue from ads compared with desktop computers. (Alibaba is a major advertising player, with an expected 4.6% share of the world's digital ad revenue in 2015, according to eMarketer. The internet giant does not break out details on its ad revenues.)

Investor confidence has been shaken, with the company's market value plunging $100 billion, amid a domestic economy growing at the weakest pace since 1990 and lawsuits over counterfeits.

"Online shopping in larger cities in China has already reached saturation," Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP, said before the earnings. "Alibaba needs to invest in new areas to search for other avenues of growth."

Alibaba Group Holding Ltd. shares fell to as low as $69.08 in pre-market trading. The shares have never traded below the $68 paid in September's initial public offering that raised a record $25 billion.

The e-commerce operator will purchase its shares over a two-year period, mainly to offset dilutions such as from its compensation programs, in its first buyback since listing.

Slowing economy
Gross merchandise volume, which measures transactions on its Chinese retail marketplaces, rose 34% to $105 billion in the quarter, short of the 38% growth expected by analysts.

That hasn't dulled billionaire Chairman Jack Ma's appetite for expansion. On Monday, he announced a $4.6 billion investment in Suning Commerce Group Co. to get more access to the electronics retailer's network amid intensifying competition from online shopping site Inc.

Ma is trying to diversify Alibaba's businesses while simultaneously tapping more of the 594 million Chinese who access the Internet from their smartphones and tablets.

Tencent takeaways
Alibaba's main rival, Tencent Holdings Ltd., also reported quarterly earnings on Wednesday, with profits rising 25% to a better-than-expected $1.1 billion in the second quarter. Revenue was $3.7 billion, 19% more than a year earlier. Yet it was Tencent's slowest growth on record. The company has averaged roughly 30% revenue increases in each of the previous five quarters.

The bright spot was advertising revenue, an increasingly large source of income for Tencent, which has traditionally relied on online games to make money.

Advertising revenue almost doubled to hit $642 billion, boosted by higher-cost video advertising linked to popular shows like The Voice of China and NBA basketball games.

The company's all-purpose app WeChat has added more ads in its "Moments" section, a Facebook-like feature where users post photos and status updates. The company also reported that WeChat now has 600 million monthly active users, up 9.2% from the previous quarter. The app, known as Weixin in China, is Tencent's main platform for social media, gaming and advertising.

~ Bloomberg News and Ad Age staff ~

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