Chinese internet giant Alibaba (BABA) reported earnings on Thursday morning, and investors didn't like what they saw.

Alibaba reported December quarter (fiscal third quarter) revenue of $12.76 billion (up 52% in dollars) and adjusted EPS of $1.63. While revenue topped a $12.36 billion consensus, EPS missed a $1.67 consensus. Those figures, however, were impacted by the yuan's rapid rise against the dollar since the end of the quarter, when Alibaba calculated its quarterly numbers.

Shares of Alibaba tumbled almost 6% on Thursday following the report, although it should be noted the stock has recently been trading at or near all-time highs and thus faced high expectations. On Friday morning, shares were trading down another 1.7% to $188.91.

Alibaba also hiked its fiscal 2018 (ends in March) revenue growth guidance to a range of 55% to 56% from a prior range of 49% to 53%. Revenue is benefiting from a deal (announced in late September) to up Alibaba's stake in its Cainiao logistics unit above 50%. Cainiao, which might not have been factored into some analyst estimates, contributed $600 million to Alibaba's December quarter top line. 

Here are some key takeaways from the report:

1. Alibaba is dialing up its spending.

Thanks to big investments in both data centers and retail initiatives -- including offline initiatives such as the company's Hema supermarkets -- Alibaba's adjusted cost of revenue equaled 40% of revenue, up from 35% a year ago. In addition, sales/marketing spend rose to 10% of revenue from 8%, thanks partly to heavy Singles Day promotional activity.


All of that naturally weighed on EPS. Like a handful of other U.S. tech giants, Alibaba is comfortable depressing short-term profits in the name of long-term growth, and investors have largely given it a green light to do so.

2. Chinese e-commerce momentum remains fairly healthy.

Revenue for Alibaba's China Commerce Retail segment, which covers its massive Taobao and Tmall marketplaces, rose 47% in local currency to $9.24 billion. That's down from the 64% growth recorded in the September quarter (not surprising) and might not be quite as high as some bulls hoped following a big run-up, but is still better than the 42% growth recorded a year ago.

The segment's "customer management" (ad) revenue rose 39% thanks to higher ad prices. Commission revenue rose 34%, and "Other" revenue, which includes offline businesses and is still less than 10% of the segment's revenue, grew 525%. Taobao/Tmall annual active shoppers rose 16% annually to 515 million. A gross merchandise volume (GMV) figures wasn't shared; Alibaba now only breaks that out at the end of each fiscal year.

In remarks on the company's earnings call, Alibaba vice chairman Joe Tsai noted just how fast China's economy has grown over the past 18 years, and how much room it still has to expand. 

3. Cloud and video growth was strong, but profits remain elusive.

Sales continue to boom for Alibaba's AliCloud unit, the largest player in China's burgeoning cloud infrastructure market. Cloud computing revenue rose 104% to $553 million, outpacing the September quarter's 99% growth. Alibaba claims to have rolled out 396 new AliCloud products and features last quarter.

Digital Media & Entertainment revenue, driven by the Youku Tudou video platform and the UCWeb mobile browser, rose 33% for the second straight quarter and totaled $832 million. Alibaba notes Youku's "daily average subscribers" more than doubled annually.

But with Alibaba continuing to make big data center and original content investments, both businesses continue producing red ink. The Cloud Computing and Digital Media & Entertainment segments respectively posted adjusted EBITDA of negative $28 million and negative $340 million.

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