Here's Why Alibaba Keeps Losing Valuation Whereas Tencent Keeps Growing

Alibaba and Tencent, two giants in China’s technology landscape, have recently exhibited contrasting fortunes. Alibaba’s market value has declined to about half of Tencent’s, a shift attributed to several factors. This article aims to elucidate these differences, providing insights into why Alibaba struggles while Tencent continues to thrive.

Alibaba’s Challenges

Regulatory Issues and the Ant Group IPO Cancellation: Alibaba’s troubles began when China’s regulators halted the IPO of its financial technology subsidiary, Ant Group, in late 2020. This regulatory action was a significant setback as the IPO was anticipated to be the biggest of its time. This crackdown on Big Tech in China aimed to reduce the market power of tech giants and protect consumers.
E-Commerce Market Share Decline: Despite being China’s largest online commerce marketplace, Alibaba’s share in the e-commerce market has steadily decreased from 78% in 2015 to about 51% in 2021. This decline reflects intensifying competition and changing consumer habits. Alibaba’s reliance on search-based e-commerce has become less appealing to younger consumers who favor live streaming and other interactive shopping methods.
Changing Consumer Habits and Economic Slowdown: The slowing Chinese economy and evolving consumer habits have also impacted Alibaba. Young consumers are becoming more rational in spending, and the country’s economic growth has slowed significantly. This change in spending patterns affects Alibaba’s core e-commerce business.
Restructuring and Regulatory Adjustments: Following the regulatory crackdown, Alibaba had to pay a substantial antitrust fine and change its business model. These changes, particularly in the lucrative lending business of Ant Group, reduced profitability and affected data harvesting capabilities. Alibaba has also undertaken a restructuring plan, dividing its e-commerce business into separate global and domestic units to adapt better to market demands.
Focus on Cloud Computing Amidst Regulatory Challenges: Alibaba has been expanding in cloud computing, a sector that continues to grow. However, regulatory challenges persist in this domain, with the Chinese government urging state-owned enterprises to shift their data from private operators like Alibaba to government cloud infrastructure.

Tencent’s Success

Diverse Business Portfolio and Profitability: Tencent, primarily focused on social media and gaming, reported better-than-expected profitability across its main business lines in the third quarter. The company has grown in various divisions, including gaming, advertising, and fintech.
International Market Exposure and Currency Gains: Tencent benefits more from foreign currency gains against the Yuan, given its slightly higher revenue from international markets than Alibaba. This currency advantage has favorably impacted Tencent’s earnings.
Competitive Position and Investment Strategy: Tencent owns significant stakes in many of its competitors, allowing it to benefit from their success. This strategic positioning gives Tencent a more robust competitive edge than Alibaba, which faces intense competition from companies like JD.com and Pinduoduo.

Conclusion

Alibaba’s decline relative to Tencent is multifaceted. It involves regulatory challenges, shifts in consumer behavior, intense competition, and strategic misalignments. Meanwhile, Tencent’s diversified business model, successful international ventures, and smart investment strategies have expanded its global footprint. While most people may not be aware of these companies’ involvement, they remain industry giants.