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Why Alibaba Is Down 10% in 2018

By Nicholas Rossolillo – Nov 16, 2018 at 8:17PM

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Big gains in e-commerce haven’t been enough to combat negativity.

After a strong first half of 2018, shares of Alibaba (BABA 0.57%) 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. Let her sleep, 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% 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.

Metric

Six Months Ended September 30, 2018

Six Months Ended September 30, 2017

YOY Increase (Decrease)

Revenue

166.1 billion RMB

105.3 billion RMB

58%

Operating income

21.5 billion RMB

34.1 billion RMB

(37%)

Earnings per share

10.93 RMB

12.43 RMB

(12%)

Data source: Alibaba quarterly earnings. YOY = year over year. RMB = Chinese renminbi. 

Alibaba's operating income of 21.5 billion Chinese Renminbi ($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% and 32% year-over-year increase, respectively. That helped drive a 56% 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 $30 billion on Singles Day 2018, smashing last year's $24 billion record.

A man inputting credit card information while shopping from his tablet.

Image source: Getty Images.

While over 80% 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% year over year in the last quarter, to 5.67 billion RMB ($825 million), and media and entertainment was up 24%, to 5.94 billion RMB ($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.

Nicholas Rossolillo and his clients own shares of Alibaba Group Holding Ltd. and Tencent Holdings. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool has a disclosure policy.

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