Alibaba Turns To Travel As Profit Zooms

Alibaba profit surges in Q2

Too much money isn’t always a good thing, as it often pressures companies to put that money to work even when good investment opportunities are limited. Baidu (Nasdaq: BIDU) demonstrated that reality earlier this week with its purchase of an online app store that had little relationship with its core online search business (previous post), and now Alibaba is also showing similar tendencies with its investment in an online travel services website. In Alibaba’s case, the new investment come as the e-commerce leader posted a record second-quarter profit, and as it prepares for a blockbuster IPO that increasingly looks like it will take place in Hong Kong.

I’ve tried to limit my writing about Alibaba in the last few months, as the company has become a near non-stop source of news about its latest investments and speculation on its IPO. But it’s been a few weeks since my last Alibaba story, and the latest reports seem like a good chance to resume the tale of this company whose latest earnings officially make it the most profitable Internet firm in China.

Alibaba’s profit tripled to $669 million in the second quarter from $220 million a year earlier, according to figures released by major shareholder Yahoo (Nasdaq: YHOO). (English article; Chinese article) The figure was slightly more than the $650 million first-quarter profit posted by social networking and gaming giant Tencent (HKEx: 700), and about twice the first-quarter profit of $330 million for Baidu.

Alibaba’s second-quarter revenue grew by a more modest 71 percent to $1.38 billion. That was well behind Tencent’s latest quarterly revenue of $2.16 billion, meaning Tencent still has a comfortable lead for the title as China’s largest Internet company. The limited Alibaba results are released quarterly by Yahoo, which owns about a quarter of the Chinese firm.

Alibaba’s booming profits, combined with a recent influx of funds from some major new investors, have left the company flush with cash, which it is now trying hard to spend on a wide range of new investments. The company has made major moves into the mobile and financial services spaces this year, picking up a big stake in the Twitter-like Sina (Nasdaq: SINA) Weibo and launching some innovative new financial products.

While both of those directions have some relationship to its core e-commerce business, I was a bit more puzzled by the company’s latest purchase of a stake in online travel services firm called Qyer.com. (Chinese article) There aren’t many details about this latest purchase in the official announcement, though reports say Qyer.com has about 10 million registered users, about half of whom access the service online. Alibaba said that Qyer.com will complement its existing online travel services offered under its Taobao brand name.

I shouldn’t be too critical of Alibaba for this move that’s well outside its core business, as it’s hardly alone in eying the online travel services market now led by independent operators Ctrip (Nasdaq: CTRP) and eLong (Nasdaq: LONG). Baidu also entered the space with its purchase of a controlling stake in a site called Qunar a couple of years ago, and Alibaba competitor Jingdong has also launched its own online travel service.

I’ve complimented Baidu in the past on its purchase of the stake in Qunar, an innovative company that appears to have strong growth potential. But I’ve also pointed out that Baidu won’t get much synergies from Qunar either due to their very different businesses. I’ve also been critical of Jingdong for venturing into too many new product areas. We’ll have to watch to see if Alibaba starts to follow down the same road by making questionable purchases outside its core e-commerce business, reflecting the growing pressure it’s feeling to put its big cash pile to work with new investments.

Bottom line: Alibaba’s surging profits are putting growing pressure on the company to make new investments.

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