Alibaba and Tencent are facing the end of an era as sales begin to shrink

(Bloomberg) — For nearly a decade, Alibaba Group Holding Ltd. and Tencent Holdings Ltd. they embodied China’s economic miracle, maintaining a breakneck growth rate and approaching trillion-dollar valuations with explosive forays into every corner of the Internet.

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That spectacular run could officially end on Thursday, when the e-commerce powerhouse founded by Jack Ma is expected to post its first-ever drop in quarterly revenue — one of the few major Chinese internet companies ever to do so. Billionaire Pony Ma’s Tencent, the social media powerhouse, could follow suit days later.

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 arch-rival 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 China’s earnings given the lockdown, and technology is no exception,” said Bloomberg Intelligence analyst Marvin Chen. “Tech has also faced additional regulatory headwinds on the growth outlook, which is a more structural and longer-term trend.”

The speed and ferocity with which Beijing clamped down on online commerce, car-sharing, food delivery and gaming have irrevocably reset growth expectations for the industry last year. But Alibaba has been hit harder than many of its peers.

There was the tax evasion investigation into famous livestreamer Viya, who once single-handedly moved $1.2 billion worth of goods during Alibaba’s Nov. 11 online bonanza. The country’s technology watchdog then suspended ties with the cloud firm over a late disclosure of a major software vulnerability, spooking 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 biggest cybersecurity breach — a leak of files on a billion residents from the Shanghai police database.

All this happened as China narrowly escaped an economic contraction in the second quarter, when rolling Covid lockdowns reduced spending on everything from online content to clothing and electronics.

Once candidates to join companies such as Apple Inc. and Inc. in a select club of companies with trillion-dollar valuations, China’s biggest internet companies are now struggling to keep up with even the most overburdened utilities. Analysts from Susquehanna to Deutsche Bank tried to cut their targets as Hangzhou-based Alibaba continued to fall to new lows.

“It was when investors bought shares of Alibaba and Tencent hoping that their dominant positions in e-commerce, social networks and gaming would create synergies with their newer businesses and huge groups of holding companies,” said Ke Yan, an analyst based in Singapore. with DZT Research. “But that’s a long-lost cause after 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) for the quarter ended in June.

Tencent’s prospects aren’t much better. Although regulators resumed approving new games in April after a months-long hiatus aimed at curbing addiction, the country’s top developer has yet to win a nod for a title this year. That’s one reason analysts are predicting Tencent’s revenue to fall 1.7% in the April to June period.

Read more: Tencent, Alibaba look like Utilities after $1 trillion

Market sentiment toward Chinese tech stocks has moved wildly in recent weeks, reflecting a persistent struggle to counter a deluge of negative signals on expectations that Beijing will finally ease its crackdown.

Alibaba rose as much as 6.5 percent on July 26 after announcing its decision to file for a primary listing in Hong Kong that paves the way for millions of mainland investors to buy the stock directly. It gave up those gains within days as investors weighed the implications of Ant’s co-founder gaining control. As things get complicated, Alibaba has become the latest to join a growing list of Chinese companies facing delisting from U.S. exchanges over Beijing’s refusal to allow U.S. officials to review the work of their auditors.

The rest of China’s tech universe isn’t doing so well either. Search leader Baidu Inc. is also expected to report a 5.6 percent revenue decline in the June quarter. Inc., food delivery giant Meituan and streaming service Kuaishou Technology are projected to expand at their slowest pace in years.

Chinese tech executives have repeatedly warned investors to prepare for a new reality of subdued growth, but the negative forecasts paint a gloomier picture than many had feared. As Covid lockdowns paralyze business in cities from Shanghai to Shenyang, China’s once reliable economic engine has lost steam.

Retail sales rose 3.1% in June, up from 12% a year earlier. For Alibaba, that translated into expectations that revenue from its China Commerce division would grow just 1 percent — its worst quarter on record.

Even Alibaba’s cloud division is flagging. Its revenue is forecast to rise 14.3% in the April to June period, but that’s the second lowest figure in about six years.

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

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