Alibaba’s Net Income, Revenue Surge on Growth in Online Sales

By Liza Lin

Stock has gained more than 80% this year, compared with Amazon.com’s advance of about 28%

SHANGHAI—Alibaba Group Holding Ltd. reported a surge in revenue and profit on surprisingly strong online sales, sending its shares to new altitudes Thursday—a scenario few investors saw coming two years ago.

Back then, Alibaba investors were wary of slowing revenue growth for the e-commerce giant and a costly battle for mobile market share in China’s online retail marketplace.

Today, naysayers are hard to find as Alibaba has filled its coffers by tapping into China’s mobile shopping spree with its Taobao shopping app. Investors have sent Alibaba’s share price soaring 87% since the start of the year.

On Thursday, Alibaba said its fiscal first-quarter earnings nearly doubled from the year-earlier period to $2.2 billion. Sales rose 56%, to $7.4 billion, beating analysts’ estimates.

Alibaba shares closed up 2.8% at $163.92 in New York trading, above the stock’s record close Wednesday of $159.50 a share. The stock’s more than 80% advance this year compares with gains of about 28% for Amazon.com Inc. AMZN -0.26% and 9% for the S&P 500.

Alibaba is cruising on a wave of spending by China’s growing middle class, which now numbers about 130 million people, nearly all carrying smartphones. With consumer-to-consumer selling on its Taobao app and website, and its Tmall online marketplace for branded products, Alibaba has captured a huge portion of China’s online retail activity, not to mention a trove of consumer-behavior data. By adding video and other content innovations to Taobao, Alibaba has managed to keep shoppers engaged and coming back.

“Alibaba has been very successful in transforming the business to mobile from the desktop,” said Hans Chung, a Portland, Ore., analyst with Pacific Crest.

Just as Facebook had to reposition to adapt to consumers’ needs as they shifted to mobile, so Alibaba has faced challenges, Mr. Chung said. Alibaba in 2015 posted its slowest revenue growth in more than three years, and investors, spooked by its seeming fallibility, sent shares plunging almost to the stock’s 2014 listing price.

Since then, Alibaba has taken large strides in improving users’ experiences with its app, leveraging its technology to personalize shoppers’ home pages and to send them targeted ads. Alibaba’s mobile monthly active users now exceed 520 million.

Alibaba also introduced new features to grab Chinese consumers’ attention. The Hangzhou firm caught on early to China’s love for live-streaming video and introduced live-streaming marketing channels on its Taobao app. They feature short-form video and consumer forums to keep buyers on the app longer.

Alibaba’s fortunes have benefited as higher incomes have spurred China’s middle class to make bigger purchases and to seek upgrades. Whereas Chinese buyers once sought out e-commerce platforms offering cheaper prices and variety, now they search for higher-priced cross-border products and luxury brands.

“If you believe China is going to be a lot bigger in a decade than it is today, and that the consumer in China will spend more money than they do today, this company will benefit,” said Mitchell Green, managing partner of Lead Edge Capital and an Alibaba investor.

Beneath its rosy financials, though, Alibaba has a few thorns.

The Securities and Exchange Commission has launched an inquiry into Alibaba’s accounting practices and has asked the company for more details about a delivery affiliate and operating data from an online discount festival. Since making the investigation publicly known in May, Alibaba has yet to release any additional information or updates on it.

And the Taobao website was included on a U.S. agency’s list of global marketplaces known for selling counterfeit and pirated goods last year, while critics say the company hasn’t done enough to keep fakes off the site.

In a rapprochement with luxury-goods makers, Alibaba reached an agreement this month with Kering Co., the French parent of luxury labels Gucci and Saint Laurent, to end a legal battle over fake designer merchandise sold on Alibaba websites and to work together to pursue counterfeiters. Alibaba last week said it cut the time needed to act on a fake-goods complaint from a rights holder to less than 24 hours, down from as long as four days. And it has opened a dedicated space on Tmall stocking high-end products from fashion brands such as Loewe, Burberry and Hugo Boss .

Meanwhile, JD.com Inc., a much-smaller Alibaba rival, is gaining ground, forcing Alibaba to step up coupons and discounts in recent months, analysts say. JD, which reported a second-quarter loss Monday, plans to open a luxury platform on its online retail site, ratcheting up the competition Alibaba faces for China’s high-end shoppers.

Founded 18 years ago in an East China city apartment by a group led by Jack Ma, a former English teacher turned billionaire, Alibaba operates as an internet marketplace, running platforms for sellers, including individuals and small and big businesses, to connect with consumers. The company’s core commerce unit earns its money in part through merchant commissions and paid advertising.

In pre-IPO meetings with investors, Alibaba was pitched as an opportunity to invest in the growth of China’s middle class, and investors clamored for access to its shares despite concerns about its corporate governance.

At the time, Alibaba operated through a series of “variable interest entities” in China owned by senior executives, including Mr. Ma, rather than by Alibaba’s foreign shareholders. It was run with a partnership structure where 30 partners held most of the corporate control. As a result, Alibaba was barred from listing in Hong Kong.

For nearly a year after its initial public offering of shares, Alibaba’s IPO was deemed an early success as it rose 38% on its first day of trading and stayed above its $68 IPO price. Yet by August 2015, amid a global market selloff, Alibaba reported its slowest quarterly revenue growth in more than three years. It’s share price hovered on either side of the IPO line for the next year.

Despite Alibaba’s surge in 2017, China’s e-commerce growth is slowing, and Alibaba is looking to new ventures to maintain momentum, including providing services such as logistics to online merchants and physical store retailers. It said Thursday it plans to take part in a $1.1 billion investment in PT Tokopedia, an Indonesian e-commerce marketplace connecting small businesses with consumers, the Jakarta-based company said Thursday. The investment follows Alibaba’s $1 billion investment to raise its stake in Southeast Asian online retailer Lazada. It has also sought stakes in India’s PayTM.

In an interview last month, Daniel Zhang, Alibaba’s chief executive officer, said Chinese consumers are seeking personalized shopping experiences and recommendations. “The mall of the future will become a consumer community, a service center, an experience center,” he said.

—Maureen Farrell in New York contributed to this article.