Alibaba Growth Spurt Is Promising, Yet Portentous

Alibaba is getting consumers to spend more money online, and that would appear to be a good thing for the Chinese eCommerce giant, which provides consumer-to-consumer, business-to-consumer, and business-to-business sales services via web portals.

But the site is also getting Chinese merchants to spend more money to keep their products there, an arrangement that could eat the company from the inside out if it doesn’t find other sources of revenue.

Alibaba reported fiscal fourth-quarter profits tallying in at $1.4 billion. The 85 percent growth in profits reflects strong sales and the selling off of certain investments. Across the company’s eCommerce businesses, sales rose 47 percent.

So far, the story aligns with Chinese government’s statistics that depicted strong overall economic growth and increased online retail sales. Alibaba’s rivals Tencent Holdings and JD.com also enjoyed an increase, with JD.com posting its first profit this quarter.

But the bird’s-eye view shows that, for Alibaba, this year’s revenue grew more than twice as fast as its gross merchandise volume. In other words, they’re not just selling more products: Vendors big and small are being enticed to spend more to try out new services, or even to keep using the ones they’ve got.

With China’s online business boom already starting to decelerate, Alibaba is looking for ways to diversify and bring in revenue from different sources.

One option (favored by analysts) could be for the company to introduce its own business a la Amazon Web Services to deliver back-end computing to businesses.

Another (one that Alibaba has already begun to explore) would be to offer online entertainment and film, leveraging advertising data and customers to become a cultural force. However, the company’s main online video acquisition, Youku Tudou, is falling behind, and investing in it would have severe short-term impacts on profit margins, even if it might help in the long run.

Alibaba is starting to expand in the international market, which could give it a boost as the company takes root in overseas markets in Brazil, Russia, and Eastern Europe.

On a broader scale, many are rooting for Alibaba and similar companies in an era where China has been moving away from reliance on government spending and toward a more consumption-based economy like the U.S.’s.