Why Alibaba Is Down 10 Percent in 2018

After a strong first half of 2018, shares of Alibaba reversed course and now are sporting a double-digit loss on the year. U.S.-China trade tensions and declining profit margins have been to blame for the Chinese e-commerce giant’s swoon even though the company is showing few, if any, signs of being in actual trouble.

A new Chinese empire

Napoleon Bonaparte allegedly said: “China is a sleeping lion, for when she wakes she will shake the world.” That has proved true in the business world. Chinese technology conglomerates have stormed onto the world scene the last few years, and Alibaba’s retail and e-commerce-centric business is the largest of the group.

Revenues are up over 200 percent over the last 3 years, and that strong pace has continued into 2018. However, Alibaba’s profitability reversed this year due to higher expenses and heavy investment focused on revenue growth. Costs associated with the company’s fast-growing cloud-computing segment, digital entertainment, and expansion efforts outside of China were the main culprits behind Alibaba’s dip in profitability.

Alibaba’s operating income of 21.5 billion Chinese RMB (USD 3.1 billion) was a sharp decrease from 2017, though earnings improved due to income from investments. Shareholders, nevertheless, have been fretting over the pressure on the bottom line. These increasing costs, along with trade tensions and other political worries, have caused Alibaba’s shares to retreat so far this year.

A break in the clouds?

Despite the stock’s poor performance, the company’s increased spending is producing results. At the end of the last quarter, Alibaba touted 601 million annual active consumers and 666 million monthly mobile users, a 25 percent and 32 percent year-over-year increase, respectively. That helped drive a 56 percent jump in retail sales leading up to the popular Singles Day retail holiday in China, which takes place on November 11. Alibaba’s retail momentum is still intact; the company just reported sales of over USD 30 billion on Singles Day 2018, smashing last year’s USD 24 billion record.

While over 80 percent of Alibaba’s revenue comes from its core commerce segment, the company is a conglomerate of businesses — much like its Chinese technology peer Tencent Holdings. Investments into those smaller initiatives have been paying off, too. Alibaba’s cloud business grew 90 percent year over year in the last quarter, to 5.67 billion RMB (USD 825 million), and media and entertainment was up 24 percent, to 5.94 billion RMB (USD 865 million).

While investors have been concerned with trade uncertainty between the U.S. and China and with Alibaba’s declining profits, the e-commerce giant’s upward trajectory doesn’t look like it’s in distress. The company is successfully growing sales, which could mean a bigger bottom-line payoff later on. — Fool

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