INTERNET: Alibaba, Tencent Brace for Slowing Growth

By newsdoug on August 13, 2015

Bottom line: Alibaba and Tencent are starting to look similar in terms of size and tapering growth, and are unlikely to excite investors again until they can reignite growth to above the 30 percent level.

Near simultaneous releases of the latest earnings reports from Tencent (HKEx: 700) and Alibaba (NYSE: BABA) are providing a good opportunity to compare China’s 2 largest Internet companies, and also how they’re doing at the moment and what their prospects look like. The pair are surprisingly similar in terms of size, but their characters and core strengths and quite different, reflecting the personalities of their founders.

Tencent’s focus on games and social networking reflects the wonky, somewhat nerdy nature of its founder Pony Ma, who feels far more comfortable networking with other geeky people and communicating online than speaking at big investor forums. Alibaba founder Jack Ma is much more of a salesman, which explains why his company has emerged as China’s leading e-commerce company.

Ma is famous for his hype, which helped Alibaba to become China’s largest Internet company in the months after its IPO a year ago, briefly surpassing even the much older global giant Amazon. But even Ma’s oratory ability couldn’t help Alibaba earlier this year when it became embroiled in a major piracy scandal, and it wasn’t much help either in boosting sentiment when the company announced its latest quarterly results.

Alibaba shares slid 5 percent after it announced the results, reaching lows not seen since its IPO, as the company failed to meet expectation for stronger revenue growth. Tencent shares slipped 4.2 percent before it released its results, though they bounced back in early trade the next day. With those latest movements, Alibaba now has a market value of $184 billion, while Tencent is about $170 billion. Both figures are well off their highs, reflecting a 30 percent drop in Alibaba’s value since the beginning of the year and a 17 percent slide for Tencent since mid-April.

Unimpressive Growth

All that said, let’s do a quick side-by-side comparison of the companies’ latest quarterly reports, starting with revenue of $3.3 billion for Alibaba versus $3.6 billion for Tencent. (Alibaba announcement; Tencent announcement). In terms of growth, the Alibaba figure was up 28 percent from a year earlier, missing market forecasts for $3.4 billion, which may have helped to spark the sell-off for its shares. Tencent’s revenue was up by a weaker 19 percent.

Alibaba’s operating income actually fell by 25 percent due to share based compensation expenses, and would have risen 16 percent without that. Tencent, meantime, posted a profit increase of 25 percent.

Frankly speaking, none of these figures look that impressive for the kinds of big-growth companies that Alibaba and Tencent are supposed to be, and one report noted that Alibaba’s latest revenue figure grew at its slowest rate in 3 years. In a bid to support its sagging shares, Alibaba announced it would buy back as much as $4 billion worth of its shares over the next 2 years. Leading search engine Baidu (Nasdaq: BIDU) announced a similar plan to buy back up to $1 billion worth of stock after reporting similarly disappointing results a couple of weeks ago.

Alibaba, Tencent and also Baidu are all facing the same problem of finding new sources of growth as potential slows in a Chinese market where they already dominate in their core areas and face growing competition. None of the companies has shown a very cohesive international strategy yet, which is the logical place to look for new growth in this situation. Alibaba made a step in that direction earlier this month by hiring a former Goldman Sachs senior executive to head its international operations.

In this case the bottom line seems relatively obvious, namely that these companies and their stocks are looking at relatively modest gains and possibly even more declines in the next year until they can prove to investors that they’re worthy of current valuations that are still quite lofty.

Both Alibaba and Tencent currently trade at a price-to-earnings ratio of about 45, which is the kind of premium you’d expect for a company growing at least 30 percent a year and probably much more. Until these companies can find that kind of growth again, which may not happen anytime soon, look for their stock prices and valuations to remain sluggish.