Please ensure Javascript is enabled for purposes of website accessibility

Alibaba and Tencent Show Some Businesses Will Be Fine During the Coronavirus Meltdown

By Nicholas Rossolillo - Mar 22, 2020 at 4:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There will be economic pain for sure, but some stocks were built for times like this.

Even in the midst of a crisis, money continues to move -- somewhere. And while the economic fallout from the COVID-19 pandemic will likely be dealt with for some time, there are early signs that certain business models will be particularly resilient.

Investors can look to China, which took the initial brunt of the crisis in January and February 2020 and has been reporting a steady drop in new infections, for clues. And there's no better place to start than with tech giants Alibaba (BABA 2.04%) and Tencent (TCEHY -0.24%). While debate rages as to how accurate the new infection rate actually is in China, business results are at least indicating that internet-based operations will fare just fine.

Looking forward to better times

First, it's worth mentioning Alibaba and Tencent's earnings results from 2019. During the final quarter of the calendar year -- which includes China's massive Nov. 11 "Singles Day" shopping holiday -- Alibaba's total revenue increased 38% to RMB 161.5 billion ($23.2 billion). Both adjusted and unadjusted earnings per share increased 49%. While e-commerce and all the related segments (electronic payments, advertising, etc.) continued to lead the way higher, Alibaba's small cloud segment also notched 62% growth to $1.5 billion in sales.

As for Tencent, its fourth-quarter revenue reaccelerated to 25% growth, or RMB 105.8 billion ($15.1 billion). Earnings per share increased 51%, or 28% on an adjusted basis for year-over-year comparability. Its social network platform and myriad services -- from video to connected healthcare -- continued to decelerate, generating only 12% more fees in 2019. But the video game segment rebounded, especially internationally as Tencent said that nearly one-quarter of sales now come from outside China. And the fintech and advertising segments grew 39% and 19%, respectively, during the year.  

A small grocery cart full of boxes sitting on top of a laptop computer.

Image source: Getty Images.

But that was then, and now is now. So what did Alibaba and Tencent have to say about the current quarter, which will contain the bulk of China's crackdown to battle COVID-19? No specific guidance was provided as the companies continue to sift through the numbers and adapt to challenges.

At the very least, a slowdown is to be expected, if not a decline in business. However, Alibaba shed some light on the situation during its last earnings call in mid-February: Results will be mixed. Retail and restaurant ordering was down significantly through the middle of February, as there were delays for many getting back to work after the Chinese New Year. Travel booking is also down. However, other areas like grocery shopping and delivery are up sharply, as are digital communication tools and video chat services.  

The story was similar over at Tencent, which reported on March 18 -- close to the end of the first quarter of 2020 and with far more visibility on coronavirus disruption. Again, no hard numbers yet, but digital payments are expected to be down (but not a drag on profitability as Tencent reduced costs), as are cloud services as some business partners delayed implementing new projects to deal with the crisis. However, digital entertainment and advertising are expected to continue showing strong performance. Tencent also talked up its digital healthcare capabilities as millions of Chinese jumped aboard its social and video tools to check in with doctors and other healthcare professionals.  

Coronavirus won't end the world, but it will reshape it

What does all of this equate to? While there are obvious question marks, investors should probably brace for some declines in revenue and profit at Alibaba and Tencent in at least the next quarter, perhaps even for another quarter or two after that. However, Alibaba CEO Daniel Zhang had this to say on the earnings call:  

Seventeen years ago, the e-commerce business experienced tremendous growth after SARS. We believe that adversity will be followed by change in behavior among consumers and enterprises and bring ensuing opportunities. We have observed more and more consumers getting comfortable with taking care of their daily living needs and working requirements through digital means. We are confident in the ongoing digitization of China's economy and society and are ready to see the opportunity to build the foundation for the long-term growth of Alibaba's digital economy.

Put simply, measures taken in China to control with the outbreak are not the end of its economy, and the rest of the world can take solace in this as other countries impose limits on movement and social interaction in the coming weeks and months. In fact, while it will be disruptive to the non-digital world, businesses that were built on a digital model will be just fine -- if not thrive like never before once the dust settles. Alibaba and Tencent investors, brace for some worst-case-scenario ugly quarterly reports, but keep investing with confidence for the long haul. For investors in similar technology names here in the United States, the story should play out very similarly.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$45.28 (-0.24%) $0.11
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$116.00 (2.04%) $2.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.