Alibaba Earnings And The China Syndrome Drag Markets Lower

  • Alibaba results disappointed the street amid a general slowdown in China’s economy.
  • Alibaba shares opened trade in New York about 5% lower, and U.S. stocks will fall in response.
  • Alibaba is still growing at double-digit rates, and China is still growing at 6% per year.
Alibaba earnings

Markets are over-reacting to China’s “devaluation” of the Yuan and a revenue miss by Alibaba (NYSE:BABA), which will create some serious bargains over the next month. As mentioned earlier, Alibaba earnings have in fact been a major wind for the broader market direction.

After all, the Euro went through a much larger adjustment starting in September, falling from $1.30 to below $1.10 in March before stabilizing near that level since. The U.S. is still doing business with Germany. The dollar-yuan move is smaller than that of Europe, just more sudden, as China is not yet a global reserve currency.

The yuan is now worth 6.40 to the dollar, against 6.20 yuan at the start of the week.

The "revenue miss" by Alibaba, showed revenues of $3.27 billion instead of the expected $3.37 billion, and the gross volume of goods trafficked on the platform rose “only” 34% instead of the expected 38%. The devaluation, should it hold, will obviously impact those numbers going forward.

Alibaba’s response was to announce it will buy back $4 billion of shares, about 2% of its market cap, over the next two years.

It was inevitable that growth at Alibaba would slow. As numbers get bigger, it’s harder to grow them. As competition grows, it’s also harder to get growth for one particular company. Alibaba revenues had previously been growing at a 56% year-over-year rate. Ratcheting that down brings out the bears.

A closer look at the Alibaba earnings announcement shows things weren’t that bad. Net income outside the Alibaba Pictures unit, which was spun out, came in at about $1 billion. Some of the slowdown can be blamed on the company’s suspension of its lottery business in February, under government orders. Alibaba’s Aliyun cloud brought in $78 million in revenue during the quarter, double what it had a year before, and revenue outside China now represents over 10% of the total, $282 million vs., $2.7 billion in China revenue.

Still, the bears were determined to have their day. Shares opened for New York trading down 40% from their November peak of $120, at $72.32. While that is above the IPO price of $68, shares have never traded this low on public markets since, with the first New York trade on that September morning coming in at nearly $94.

Alibaba shares are also being seen as a proxy for China, where steel production is down 4.6% from a year ago and steel prices down 28%, while most plants have either shut down or had their output halved. Factory output, retail sales and fixed investment figures all missed expectations but were still up 6% from a year ago. Analysts were looking for a gain of 6.8%.

The suddenness of the slowdown and the government’s response now have American investors questioning both the government’s commitment to free markets and its general economic management. The government has been cracking down on free speech all year, the thinking goes, and the yuan depreciation, along with the government’s micro-management of its stock exchanges, are providing an excuse for U.S. politicians  to ratchet up their anti-China rhetoric.

But here’s the real bottom line. China is still growing at more than double the rate of the U.S. economy. Alibaba is still growing its revenues faster than Amazon.Com. When the smoke clears you can make money on both.

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