As sales began to decline, Alibaba and Tencent are looking at the end of an era

For nearly a decade, Alibaba Group Holding Ltd. and Tencent Holdings Ltd. epitomized China’s economic miracle, maintaining dizzying growth rates and approaching trillion-dollar valuations with flamboyant forays into every corner of the Internet.

That impressive run could officially come to an end on Thursday, when the Jack Ma-founded e-commerce company is expected to post its first-ever drop in quarterly revenue, one of the few major Chinese internet companies ever to do so. Tencent, fellow social media mogul Pony Ma, may follow suit in a few days.

The milestones are a reminder to investors that after a government crackdown that wiped more than $1 trillion off their combined market value in 2021, Alibaba and its longtime archrival are shadows of their former selves. Like the rest of the country, they are struggling not only with an uncertain regime, but also with Covid Zero and a consumer crisis that is testing the stability of the world’s No. 2 economy.

“It should come as no surprise that the second quarter of 2022 will be one of the worst quarters since the pandemic for earnings in China, given the lockdowns, and tech is no exception,” Bloomberg Intelligence analyst Marvin Chen said. “The technology has also faced additional regulatory hurdles in terms of growth prospects, which is a more structural and long-term trend.”

The speed and fury with which Beijing is cracking down on online commerce, car-sharing, food delivery and gaming has irreversibly dented industry growth expectations last year. But Alibaba has been hit harder than many of its peers.

There was a tax evasion investigation into live-streaming celebrity Via, who once single-handedly moved $1.2 billion worth of goods during Alibaba’s November 11 online fortune. Then a national technology watchdog suspended the cloud business for failing to disclose a major software vulnerability, scaring off potential customers.

In June, “Lipstick King” Li Jiaqi became the second major figure to disappear from Alibaba’s Taobao after apparently offending censors. And just last month, cybersecurity experts linked Alicloud to China’s largest cybersecurity breach, the leak of records about a billion residents from a Shanghai police database.

All this comes as China narrowly avoided an economic downturn in the second quarter, as prolonged Covid lockdowns reduced spending on everything from online content to clothing and electronics.

China’s biggest Internet companies, which were once candidates to join companies such as Apple Inc. and Amazon.com Inc., into a select club of trillion-dollar companies, are now struggling to keep up with even the most resilient utilities. Analysts from Susquehanna to Deutsche Bank have tried to cut their targets as Hangzhou-based Alibaba continues to sink to new lows.

“It used to be that investors bought shares of Alibaba and Tencent in the hope that their dominant positions in e-commerce, social media and games would create synergy with their new businesses and huge number of portfolio firms,” ​​said Ke Yang, an analyst in Singapore. from DZT Research. “But it’s long been a lost cause since the government’s crackdown.”

Alibaba reports earnings on Thursday. Its revenue is forecast to fall 1.2 percent to 203.4 billion yuan ($30.1 billion) in the three months ended June.

The outlook at Tencent isn’t much better. Although regulators resumed approving new games in April after a months-long hiatus designed to combat addiction, the country’s top developer has yet to clear a single title this year. That’s one reason why analysts are predicting a 1.7 percent drop in Tencent’s revenue between April and June.

Market sentiment toward Chinese technology stocks has fluctuated sharply in recent weeks, reflecting a persistent struggle to reconcile a flood of negative signals with expectations that Beijing will finally ease its crackdown.

Alibaba rose 6.5 percent on July 26 after announcing its decision to file for an initial public listing in Hong Kong, paving the way for millions of mainland investors to buy shares directly. It gave up those gains for several days as investors weighed the implications of handing over control of Ant to Ma’s co-founders. Complicating matters, Alibaba has become the latest to join a growing list of Chinese firms facing delisting from U.S. exchanges because of Beijing’s refusal to allow U.S. officials to review the work of their auditors.

The rest of the Chinese tech universe isn’t doing so well either. It is also predicted that the leader of the search company Baidu Inc. to report a 5.6 percent decline in revenue in the June quarter. JD.com Inc., food delivery giant Meituan and streaming service Kuaishou Technology are forecast to expand at their slowest pace in years.

China’s tech chiefs have repeatedly warned investors to brace for a new reality of subdued growth, but the bleak outlook paints a bleaker picture than many had feared. As the Covid lockdown paralyzes business activity in cities from Shanghai to Shenyang, China’s once-reliable economic engine has lost steam.

In June, retail sales grew by 3.1 percent against 12 percent a year earlier. For Alibaba, that translated into expectations that revenue from its bread-and-butter unit China Commerce would grow by barely 1 percent — its worst quarter on record.

Even Alibaba’s cloud division is weakening. Its revenue is forecast to rise 14.3 percent between April and June, but that’s the second-lowest figure in six years.

“The worst should be behind us as the economy picks up pace and lockdowns ease, but it could be a bumpy recovery depending on the Covid situation,” Chen said. “On the technology front, sales growth may pick up, but earnings may be more volatile depending on cost-cutting measures and investments made over the past year.”

Written by Coco Liu

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