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

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

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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.

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Stocks Mentioned

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

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