Technology · August 3, 2022

Income fixed for the first fall

Alibaba faces growth challenges amid tightening regulation of China’s tech sector and a slowdown in the world’s second-largest economy. However, analysts believe the e-commerce giant’s growth could pick up by the end of 2022.

Kuang Da | Jiemian News | vcg | Getty Images

Alibaba’s revenue could fall for the first time on record when the company reports June quarter results on Thursday, analysts predict, although it could signal the bottom for sales.

According to consensus forecasts from Refinitiv, the Chinese e-commerce giant is expected to report total revenue of 203.23 billion yuan ($30.05 billion) in the first quarter, down 1.2% year over year.

Alibaba’s revenue has slowed sharply over the past year due to a slowdown in China’s economy, a resurgence of Covid and subsequent lockdowns, and tightening regulation of the domestic tech sector.

But the June quarter could mark a bottom for Alibaba’s results as earnings are expected to improve in the coming quarters.

“Overall, we believe the weak June quarter results are broadly awaited by investors and the current focus for the stock is on the second half recovery trend, which we remain positive on as the government continues to increase economic stimulus, to meet their GDP growth target,” US Tiger Securities said in a statement last month.

Refinitiv estimates that its September quarter revenue is expected to grow 7%, while the December quarter could see growth of nearly 10%.

The softness in this week’s report will mainly stem from weakness in the company’s trading revenue in China, China Merchants Securities said in a statement released last month.

Sluggish consumption will weigh on customer purchases, while revenue from customer management, or CMR, will also fall due to vendors’ tighter advertising budgets on Alibaba’s platforms, China Merchants Securities said.

CMR is revenue Alibaba earns from services, such as marketing, that the company offers to merchants on its Taobao and Tmall e-commerce platforms. Vendors cutting ad spend are hitting Alibaba’s CMR.

However, China Merchants Securities said it is seeing a “gradual recovery in China’s merchant business … with improved profitability thanks to disciplined cost controls.”

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Alibaba could get some tailwinds to support its recovery in the coming quarters. There are signs that China’s regulatory crackdown – which has seen Alibaba fined 18.23 billion yuan – is beginning to ease.

Meanwhile, the Chinese government announced a series of economic stimulus measures in May to help an economy battered by a resurgence of Covid and lockdowns in major cities, including financial hub Shanghai.

However, not all analysts expect a return to explosive growth for Alibaba.

“Imagining my ‘cone of all plausible outcomes,’ the multitude of scenarios leads to a modest reacceleration of growth back into the mid-1920s, but I also see a whole category of scenarios where things get fundamentally worse.” John Freeman, vice president at CFRA Research, told CNBC via email.

“The cone is very wide at the moment.”

Cloud computing in focus

In addition to Alibaba’s core commerce business, investors are also focusing on cloud computing revenue, though it still accounts for less than 10% of total sales. That’s because investors see Alibaba’s cloud efforts as key to the company’s future growth prospects and profitability.

“The re-acceleration of cloud growth is key for me to get the fundamentals back on track as cloud generates much more operational leverage than e-commerce fulfillment and is inherently a much more profitable business,” said CFRA’s Freeman.

“The cloud is behind most of Amazon’s value appreciation over the past decade, and that could eventually apply to Alibaba as well.”

Forecasts for the cloud business are mixed. US Tiger Securities expects cloud sales to grow 8% year over year in the June quarter, which would be the slowest growth rate on record. China Merchants Securities, meanwhile, is forecasting 13% year-on-year growth, which would be a slight acceleration from the March quarter.