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Alibaba Losing its Magic?

Posted on Thursday, Feb 19th 2015

After delivering a much awaited $25 billion IPO last year, Chinese e-commerce player Alibaba’s (NYSE: BABA) glitter seems to be wearing off. The company is dealing with the SEC and Chinese regulators on sale of fake goods on their website and the latest financial results weren’t particularly impressive. To make it scarier, Jack Ma recently said that the company “isn’t too big to fail.”

Alibaba’s Financials

For the December ended quarter, Alibaba’s sales grew 40% over the year to $4.2 billion. Growth has slowed down compared with the 54% increase reported in the previous quarter. The market was looking for $4.44 billion in revenues. EPS of $0.55 was also short of the Street’s forecast of $0.62.

By segment, revenues from China’s retail commerce business grew 32% to RMB21.3 billion (~$3.1 billion). Wholesale business revenues increased 41% to RMB860 million (~$139 million). Cloud computing and Internet infrastructure revenues increased 85% to RMB362 million (~$52.6 million) and revenues from Others came in at RMB1.9 million (~$0.28 million).

Among other metrics, mobile is a big driving force. During the quarter, monthly active users on mobile increased to 265 million from 217 million a quarter ago. Mobile users accounted for 42% of gross merchandise volume (GMV) of goods transacted on Alibaba. Alibaba still needs to figure out how to better monetize mobile especially since they have been offering free hosting of listings to attract smaller merchants to the mobile platform.

Total China marketplaces GMV grew 49% over the year to RMB787 billion (~$127 billion). Annual Active Buyers on China retail marketplaces increased 44% over the year and 8% over the quarter to 334 million.

Alibaba’s Worries

Recently, the market has been abuzz with news about several regulatory authorities pulling Alibaba up for sale of fake and counterfeit goods. Last month, China’s State Administration for Industry and Commerce (SAIC) published a white paper criticizing the lack of measures taken up by Alibaba to prevent the sale of fake goods on their website. The SAIC had also questioned Alibaba about these efforts in July 2014. The recent paper has led to several law suits in the US against Alibaba and also initiated an SEC enquiry. The regulators are questioning Alibaba for having failed to disclose the SAIC meeting in their IPO filing.

Last week, Alibaba came under further scrutiny by China’s National Development and Reform Commission (NDRC) who has been working to ensure a fair e-commerce market. The NDRC will be investigating Alibaba’s holiday pricing policies. Alibaba requires its merchants to offer heavy discounts on their prices to be able to participate in special sales and events. The NDRC believes that since merchants are not able to remain profitable at such heavy discounts, they end up increasing their prices prior to discounting them. This has led to a flurry of artificial sales on the website. While one may argue that Alibaba is only a marketplace and is not expected to control prices of the products, the NDRC expected Alibaba to have taken remedial action to stop such deceptive practices.

Alibaba’s Offerings

Meanwhile, Alibaba continues to strengthen their services portfolio. As part of their mobile expansion, they recently invested $590 million in Chinese smartphone maker Meizu Telecom Equipment. The move is expected to integrate Alibaba’s online shopping platform and cloud storage tools with Meizu’s phones. Meizu’s phones are sold with pre-installed Alibaba’s YunOS.

They are also expanding their global footprint. Recently, Alibaba’s affiliate Ant Financial Services Group announced plans to purchase a 25% stake in India’s mobile payment and e-commerce platform Paytm for an undisclosed sum. Ant operates Alipay Wallet and the investment will help Alipay get access to over 23 million users of Paytm and also enable Alibaba to test Indian markets.

Earlier this month, Alibaba entered into an agreement with LendingClub in the US in a move to assist buyers from the US to purchase products from China. Through the agreement, merchants in the US will be allowed to apply for short-term credit lines to purchase goods from Chinese suppliers on Alibaba. The businesses can apply for a maximum of $300,000 in credit for terms of up to six months. The loans will carry fixed monthly interest rates of between 0.5%-2.4%.

And to make faster deliveries, Alibaba is trying out a novel way. They recently experimented by sending out drones to deliver boxes of tea to its customers. The service is currently being tested for free in their largest markets of Beijing, Shanghai, and Guangzhou. The move comes amid news that Amazon is also seeking Federal approval for a similar service in the US. The entire drone delivery program is also fraught with regulatory land mines.

Alibaba’s stock is trading at $86.74 with a market capitalization of $215.75 billion. It touched a high of $120.00 in November last year, but has since fallen below the IPO price.


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