Covid instances increased in China during the June quarter. Beijing has maintained its “zero-Covid” policy, a stringent set of steps to manage the virus that includes lockdowns and mass testing.
Alibaba reported its first ever flat year-on-year quarterly revenue increase in the second quarter of the year, while social media and gaming company Tencent revealed its first sales decrease on record.
Chinese technology behemoths are coming off their worst quarter of growth in history, as a significant slowdown in the world’s second-largest economy, fueled by Beijing’s tough Covid policy, took its toll.
Chinese technological behemoths are coming off their worst quarter of growth in history, as the world’s second-largest economy slows, exacerbated by Beijing’s tough Covid policy.
Alibaba reported its first ever flat year-on-year quarterly revenue increase in the second quarter of the year, while social media and gaming company Tencent revealed its first sales decrease on record. JD.com, China’s second-largest e-commerce business, reported its slowest sales growth in history, while Xpeng, a developer of electric vehicles, reported a larger-than-expected loss and disappointing guidance.
These companies have a combined market capitalization of more than $770 billion.
Covid instances increased in China during the June quarter. China has maintained its so-called “zero-Covid” policy, a stringent set of steps to contain the virus that includes lockdowns and mass testing. For several weeks, major cities, including Shanghai, were shut down.
China’s economy grew by 0.4% in the second quarter, weighing on consumer confidence and corporate spending in areas such as advertising and cloud computing.
These challenges impacted China’s technology behemoths.
“Retail sales declined year over year in April and May owing to the revival of Covid-19 in Shanghai and other large cities, and has steadily rebounded in June,” Alibaba CEO Daniel Zhang said during the company’s earnings call earlier this month.
Alibaba’s logistical networks in China were also impacted, and the company announced that several of its cloud computing initiatives will be postponed.
JD.com performed well in the second quarter due to its control over a large portion of its logistics supply chain and inventory. However, in the face of lockdowns, expenses for fulfilment and logistics increased.
XPeng, an electric vehicle manufacturer, said it plans to deliver between 29,000 and 31,000 vehicles in the third quarter. However, the market expected lower guidance. In addition to seasonal weakness, XPeng president Brian Gu stated that “traffic in the stores is less than what we’ve experienced previously due to (the) post-COVID circumstances.
During the pandemic, individuals turned to online services such as shopping and gaming, which were unavailable due to lockdowns. This has made year-on-year comparisons more difficult. The Chinese economy is currently suffering a variety of headwinds this year, which has exacerbated the macroeconomic environment.
China’s IT sector is still dealing with a considerably more stringent regulatory environment. China has implemented stricter policies in sectors ranging from gambling to data protection during the last two years.
Investors are apprehensive about the forecast because growth rates have fallen more severely than in prior years.
“What I find interesting is how the narrative on the big tech companies… has changed: early in the pandemic, COVID was expected to benefit the big online platforms at the expense of ‘offline’ businesses, as much of the economy would be stuck at home with little else to do but shop online and entertain themselves online,” Tariq Dennison, wealth manager at GFM Asset Management, told CNBC via email.
The recent revenue and earnings decline in these big tech stocks shows no COVID worries in the short term, but it has many long-term investors, including myself, lowering our estimations of these names’ long-term growth potential.
Dennison stated that Tencent, Alibaba, and JD.com have previously maintained yearly revenue growth rates of more over 25%, and that a long-term downturn would be a concern.
“If this quarter is an indication of a permanent drop to single-digit growth rates, rather than merely a transitory dip,” Dennison added, “that would of course have a substantial impact on long-term valuations of these shares.”