Alibaba: From Craze to Being Sold Like Crazy; Should You Buy?

With a whopping $25 billion collection, Alibaba (BABA) staged the biggest initial public offering in recorded history in the first month of Fall 2014. The story of Alibaba is intriguing as well as interesting. While data reveals that not many people in the US actually knew about Alibaba, the Chinese e-commerce giant actually went on to break all records to establish itself as the largest IPO. Alibaba was widely covered in the media in its pre-IPO days for its rise as an e-commerce giant and ‘sound’ business model. Everybody was smitten by its success story, to say the least.

While Alibaba was being talked about everywhere, the finding of an Ipsos poll conducted from September 10-15, 2014 (a week prior to its IPO), about awareness of Alibaba, revealed contradictory results. According to the poll, only 12% American respondents knew about the Chinese e-commerce player and its upcoming IPO then. With such statistics, it may not be wrong to say that part of the credit of its IPO success can be attributed to the widescale positive publicity, which created the euphoria around it!

Alibaba’s shares were issued at the IPO price of $68 but the stock rocketed by 38% on its debut, closing at $93.89. The stock kept the momentum going and reached to a high of $119.15 within 60 days of its first trade.

Cut to September 2015: Alibaba completed one year as a publicly listed company but in an entirely altered atmosphere, where the share prices have fallen below the IPO price. There is much skepticism and investors have started abandoning BABA. The stock has lost 50% of its post-IPO high and more than 43% year-till-date. But what has gone so "wrong" with the company and its stock in this one year?

The primary factor working against Alibaba is the weakness in the Chinese economy and its likely impact on consumer spending, something that primarily drives Alibaba. It is further burdened by the story of expectations and disappointment.

However, the fact is that Alibaba was neither worthy of the grand attention it got during its IPO, nor does it deserve the kind of dejection it is receiving as of now.

Alibaba has been delivering fairly decent numbers in the past quarters; the pace of growth is slower but there are signs that are positive.

According to Alibaba’s first quarter report for fiscal year 2016, its gross merchandise value (GMV) in China’s retail marketplaces was $109 billion, a rise of 34% year-over-year while its revenue was $3,265 million, an increase of 28% year-over-year. The mobile GMV reached $60 billion which reflects a 125% year-over-year increase, accounting for 55% of total GMV transactions on its China retail marketplaces. With a figure of $1,288 million, Alibaba’s mobile revenue exceeded 50% of its total China commerce retail revenue for the first time. Alibaba’s cloud computing and internet infrastructure business also showed growth with revenues rising by 106% year-over-year to $78 million. The company’s non-GAAP free cash flow was at $1,540 million.

As per the June quarter report, as much as 83% of Alibaba’s commerce business (78% retail and 5% wholesale) is China-driven. The share of international commerce is just 9%, while cloud computing and internet infrastructure along with other miscellaneous heads contribute about 8%.

The Chinese economy has lost some momentum, which has weakened the sentiments for all businesses in China as well as Alibaba. However, this is something that was waiting to happen, any economy can’t possibly grow at 9-10% year-on-year forever; cyclical and structural disruptions triggered by internal and external factors are a part of any growth model. This doesn’t paint a gloomy picture for China though; its economy has considerable room to grow. The near-term outlook does not seem to be too encouraging but the growth story stays intact in the long-term, which means that one can confidently overlook the quarterly figures. The International Monetary Fund believes that “China is transitioning to a new normal, with slower yet safer and more sustainable growth. The growth last year fell to 7.4% and, this year, it is forecast to slow down further to 6.8%.”

Final Word

While Barron' gave a very bearish outlook for the stock saying that its shares could drop 50% further, Jack Ma during an interview at Stanford University's business school (published by Forbes) said, "Consumption is still going up on Alibaba. This is because when the economy goes down, people look online to Alibaba to buy cheaper things.”

Investors who bought the stock at $100 plus levels have done their act of bravery and picking the stock now to play contrarian, with a long-term view, may be a well-compensated move. However, there is no sure-shot way to say that the stock has hit the rock-bottom; BABA is currently being played by sentiments than fundamentals, making it vulnerable to further slide. To combat this, investors with a higher risk appetite can build a long-term portfolio with Alibaba by buying it in smaller lots over the next few months.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Prableen Bajpai

Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.

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