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Alibaba’s sales growth has rebounded, leading to a rise in its shares in New York. However, potential investment restrictions imposed by the US government threaten a key aspect of its business.
Sales in the second quarter increased by 14%, amounting to Rmb234bn ($32.3bn). This exceeded Wall Street’s expectations and marked a significant improvement from last year’s strict Covid-19 lockdowns that severely impacted the Chinese economy. This double-digit growth contrasts with previous quarters of sluggish performance.
Net profit also rose by 51% to Rmb34bn, as Alibaba prioritized cost control measures that included reducing its workforce by 6,500 employees during the quarter.
This positive earnings report from one of China’s major retailers reflects well on the country’s struggling economy. China has been facing recession warning signs such as deflation, declining exports, and challenges in its real estate sector. As a result, Alibaba’s shares experienced a more than 6% increase in early trading in New York.
However, just before Alibaba released its quarterly figures, the Biden administration revealed plans to impose restrictions on US investment in China’s quantum computing, advanced chips, and artificial intelligence sectors.
The relatively modest growth of Alibaba’s cloud unit, at 4% in the three months leading to June, combined with the anticipated US restrictions, could hinder Alibaba’s prospects. The company has concentrated most of its artificial intelligence initiatives within the cloud unit, making it vulnerable to the outbound investment controls proposed by the Biden administration.
The final version of the US regulations, according to the Treasury, may include exceptions for investing in publicly traded companies.
Under the leadership of outgoing Chief Executive Daniel Zhang, Alibaba has lost market share and experienced a significant decline in market value. Zhang will be succeeded by Eddie Yongming Wu next month, who is a follower of Jack Ma.
Zhang believes that Alibaba’s division into six entities has brought new energy to their businesses. He attributes the solid performance of this quarter to the early results of this change.
Although Alibaba’s cloud computing arm, Alibaba Cloud, has faced difficulties recently, Zhang will remain its head. The company plans to conduct a private fundraising round and public listing for the unit, followed by the distribution of shares to existing shareholders.
In addition to their internal AI initiatives, Zhang stated that the cloud unit aims to become a key provider of computing power for startups training and utilizing large language models. He believes that Alibaba Cloud will benefit from the application of AI across all industries in the long run.
Analysts on Wall Street commended the return to growth for Alibaba’s domestic ecommerce platforms, Taobao and Tmall. Robin Zhu from Bernstein noted that the most surprising aspect was the 10% growth of this business line, despite it still being relatively flat compared to previous figures.
“The question is whether they can continue to improve as they lose market share to competitors,” Zhu added.
During the quarter, Alibaba repurchased nearly 36 million US shares, amounting to $3.1 billion.
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