Shares of Alibaba closed slightly lower on Thursday despite its better-than-expected results for the June quarter which showed that most of its businesses had rebounded to pre-pandemic levels.  

The company’s revenue jumped 34% year on year to RMB 153.75 billion ($21.76 billion) for the quarter ended June, beating average analyst estimates of $21.34 billion for the e-commerce giant’s first quarter in the 2021 fiscal year. Core commerce retail and cloud computing businesses continued to be the main drivers for robust revenue growth.

Income from operations increased 42% in the quarter to RMB 34.71 billion, or 23% of the total revenue, from RMB 24. 38 billion, or 21% of revenue, in the same quarter of 2019. Meanwhile, the cost of revenue in the quarter increased by 40% year on year to RMB 84.52 billion due to increased contributions from direct sales businesses such as Tmall Supermarket and New Retail.

“Our domestic core commerce business has fully recovered to pre-Covid-19 levels across the board, while cloud computing revenue grew 59% year over year,” Maggie Wu, chief financial officer of Alibaba Group, said in a statement.

Falling short

The biggest theme of Alibaba’s June quarter result was “back to normalcy.” The majority of analysts TechNode spoke with saw the results as very “impressive,” demonstrating resilience in Alibaba’s businesses.

But share prices sagged 1.0% on Thursday in New York, signaling that investors expected more. While the company trumpeted a rebound, it was not seen as a complete return to “normalcy.”

Alibaba’s 34% year-on-year revenue growth during the quarter was robust, but it fell short of the roughly 40% average quarterly growth in the 12-month period before Covid-19.

The company’s core commerce business unit reflected the same deceleration. It generated RMB 133.32 billion in revenue in the June quarter, weakening to 34% year-on-year growth compared with 44% in the same year-ago period. Growth was mainly driven by higher purchase frequency and increasing penetration into lower-tier cities through Taobao Deals, which gained approximately 40 million monthly active users since its launch in March.

Covid-19 is still weighing on Alibaba, which earns much of its revenue from advertisement and commission fees. Both saw slower annual growth in the quarter.

Wang Shan, an analyst at Tiger Brokers, attributes this to Alibaba’s Covid-19 support policies, under which it waived platform and rental fees as well as commission for merchants on various platforms within its ecosystem from anywhere from two to six months. She further pointed out that downsized advertising budgets as a result of the pandemic also had an adverse impact on the company’s ad business.

Cloud computing revenue grew to RMB 12.35 billion, primarily driven by increased revenue contributions from both public cloud and hybrid cloud businesses. It clocked 59% annual growth in the quarter, the slowest growth since the 2018 fiscal year except for the March quarter.

Local life business unit, including Eleme and Koubei, slowed considerably under twin pressures of the Covid-19 pandemic and rising competition from Meituan. It grew 15% year on year compared with 137% in the same period a year ago.

Broader headwinds

The year 2020 has proven a difficult year for China tech firms and Alibaba may be shouldering an outsized portion of the pressure as a global firm whose performance is seen as an informal indicator of the Chinese economy.

Alibaba’s historical valuation is related to much “bigger picture issues,” John Freeman, vice president at CFRA Research, wrote in an email. “The risk for BABA is tied to the macro-economic situation, political risk, and possibility of a trade war,” he said.

Covid-19 is under control in China, but the far-reaching impact to the economy is far from over, said Michael Norris, leader of research and strategy at AgencyChina.

The country’s disposable income and urban consumption are still recovering, which means Alibaba’s consumers are still feeling the strain of reduced salaries and take-home pay. “Alibaba is only as strong as consumers’ wallets,” Norris added.

Others remained optimistic about the company’s longer-term growth prospects. “In the longer term, Alibaba is well-positioned to benefit from synergies arising from the deepening integration of its e-commerce platform (Tmall/Taobao) and its new retail and lifestyle ecosystem. We expect sustainable monetization improvements with the expansion of services offerings and stronger user acquisition and retention,” said Esme Pau, an analyst at equity firm China Tonghai Securities.

Emma Lee

Emma Lee is Shanghai-based tech writer, covering startups and tech happenings in China and Asia in general. We are looking for stories related to tech and China. Reach her at lixin@technode.com.