Alibaba's Wipeout Leaves Investors Questioning What Comes Next

Alibaba One Year Later: Did IPO Disappoint?
  • Top-ranked analyst expects drag on sales growth into 2016
  • Acquisition strategy raising eyebrows as e-commerce slows

Alibaba Group Holding Ltd. looked like a sure thing a year ago when it pulled off the largest initial public offering ever. It had a lock on China e-commerce as the economy was surging and consumer spending was steadily rising. Shares soared 76 percent from the IPO price in just two months.

Then it all crumbled. Alibaba came under fire from a China government agency, it cut deals that baffled investors and it replaced its chief executive as growth slowed. Most important, China’s economy turned wobbly, jeopardizing the rise in consumer spending Alibaba needed. Its stock slid down, down, down to the IPO price and then below. The sure thing was no such thing.

What now? Investors who watched $128 billion in market value disappear shouldn’t expect a reprieve any time soon. Atlantic Equities LLP’s James Cordwell, the top-ranked analyst covering the stock, predicts the slowing Chinese economy will undercut e-commerce transaction growth until at least 2016. The many deals Alibaba has negotiated will take time to pay off too.

“All the operating metrics seem to be pointing in the wrong direction,” said London-based Cordwell, who topped Bloomberg Absolute Return rankings for his calls on Alibaba and also recommendations across the portfolio he covers. “Until investors feel some comfort in that slowdown bottoming out, it will be hard for the stock.”

Deal Spree

Jack Ma, Alibaba’s chairman and co-founder, isn’t known for coddling investors. In a letter with the IPO filing, he said explicitly shareholders would be the third priority after customers and employees. He and his partners didn’t want short-term market volatility to distract from building a successful business for the long term.

Indeed, many of Alibaba’s troubles derive from a domestic economy over which it has no control. While conceding some missteps in its first year, Alibaba isn’t one for introspection.

“We don’t think about events backward looking, we try to look forward,” Vice Chairman Joseph Tsai said in an interview. “We have made our mistakes and we learned from them.”

The Hangzhou-based company is trying to push beyond China and e-commerce, announcing $15 billion of deals. Many of the investments make clear strategic sense, but others have been harder to rationalize, like the stakes in a Guangzhou soccer team, a minor player in Chinese smartphones and an unprofitable entertainment studio.

Come Together

“Its investment strategy does sometimes seem befuddling,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP, who rated Alibaba a D for wealth creation in his one-year report card on the stock. “When its core business was doing fine all these investments for future development were option values, but with the slowdown they make less sense.”

Ma and his partners do have a vision for how all this comes together in the next decade. The aim is for Alibaba to evolve beyond commerce into content like movies and sports, to provide payment systems for its own trade and for others and to get technology like its homegrown operating system and its cloud computing service used more broadly.

The billionaire is also counting on new investments to help connect information on the Web to consumers in the real world. The idea, known in the technology industry as O2O for online-to-offline, is to let people tap their smartphones to get almost anything they want, from groceries or dinner to a TV or a car wash. To make this a reality, Alibaba has invested in a department store chain, an electronics retailer and the ride-hailing service Didi Kuaidi.

Government Dispute

The deals may ultimately make sense, but they aren’t adding to earnings yet and the company hasn’t said when they will.

“If the e-commerce business was growing really well, then investors wouldn’t worry at all about all these investments that Alibaba’s making,” said Cordwell.

Along with disputes with China over counterfeits, the company has had to deal with media criticism. Barron’s magazine this month predicted the stock could tank another 50 percent. Alibaba said the report was based on incorrect calculations, contained factual inaccuracies and selectively used information.

John Choi, an analyst at Daiwa Capital Markets, says that despite the bad press and unfavorable economy, the fundamentals of Alibaba remain positive with e-commerce still growing.

“It’s really about the sentiment right now, the sentiment on China is so negative right now,” said Choi, who has a buy rating on the stock. “E-commerce is one of the very few verticals that is still delivering decent growth in the overall Internet sector.”

Bullish Analysts

Other analysts haven’t given up on Alibaba either. Of the 52 tracked by Bloomberg, 44 rate the stock a buy with just two recommending investors sell.

Shareholders haven’t been so bullish. Billionaires Daniel Loeb and George Soros have sold all or most of their holdings in Alibaba, as have funds run by proteges of Julian Robertson, the so-called Tiger cubs. In addition, bearish bets on the stock have risen, with short interest rising to a record.

Atlantic’s Cordwell, who has a neutral rating, sees light at the end of the tunnel, with the company ultimately emerging stronger.

“There’s going to be another two to three tough quarters for the company,” he said. The current challenge “is making Alibaba a better company for the next 10 years.”

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