07/05/2015 00:51 AST
After Alibaba Group Holding raised a record $25bn last year, founder Jack Ma said the Chinese e-commerce company faced the danger of high expectations. He might be right.
About $70bn of market value has evaporated since Ma made that statement in November as investors worry about slowing growth. Alibaba’s dominance at home as a marketplace for buyers and sellers of goods is being undermined by a Chinese economy projected to grow at the slowest pace since 1990 and a consumer shift to mobile shopping that crimps advertising revenue.
Ma’s push outside China also has yet to gain traction – its presence in the US and much of Europe remains negligible.
Results due today are expected to show that the pace of Alibaba’s revenue expansion fell below the average of the previous seven quarters. Shares of Alibaba closed on Tuesday at $79.54 in New York, 33% below their November peak and the lowest since the Hangzhou-based company sold stock at $68 apiece in its initial public offering in September.
“With the overall Chinese economy slowing down and the market saturating in large cities, overseas expansion seems even more important,” said Cao Lei, director of the China E-Commerce Research Center in Hangzhou. Alibaba’s success in China made it the nation’s biggest e-commerce operator, with everything from clothes and food to jets and cars being sold across its platforms.
Ma wants to replicate that around the world, setting a goal of generating half of sales and servicing more than 10mn small businesses outside China. But while the company has made inroads into Russia and Brazil, Alibaba currently gets less than 5% of its revenue from outside China, Ma said in March on a company Twitter account.
Alibaba’s sales probably rose 41% in the fourth quarter to 16.9bn yuan ($2.7bn), according to the average of 23 estimates compiled by Bloomberg. That compares with an average of about 50% during the past seven quarters.
The company’s strategy of expanding in under-served regions of China and overseas is driving up marketing costs as more consumers shop on mobile devices, where ads typically generate less revenue than those on desktop computers. Operating income will probably shrink 18% to 4.5bn yuan, according to the estimates.
“They have faced hurdles and difficulties that they need to overcome to reach the next level of growth,” said Matthew Kwok, chief strategist at China Yinsheng Asset Management in Hong Kong. “It has reached such success in China, it would make sense for them to replicate that business model overseas.” Alibaba declined to comment in an e-mail, citing quiet period restrictions ahead of the earnings release.
Adding to concerns around Alibaba’s growth outlook is the resurfacing of allegations that the company’s platforms, including Taobao Marketplace and Tmall.com, are a haven for counterfeiters. The Chinese government this year said Alibaba faces a “credibility crisis” for failing to crack down on shady merchants, fake goods and misleading promotions.
While investors have punished Alibaba, an index of US-traded Chinese companies has jumped by 17% this year.
Rival e-commerce operators have also surged with JD.com Inc rising 46% in New York and Tencent Holdings gaining 40% in Hong Kong through Tuesday.
The two companies have joined forces to compete against Alibaba. Tencent is trying to drive the 1bn users of its WeChat and QQ chat apps to JD.com, which recently started a service to speed imports to Chinese buyers.
As JD.com, China’s second-biggest e-commerce company, “ups its game,” said Mark Tanner, founder of China Skinny, a Shanghai-based research and marketing agency, Alibaba’s previous growth “seems unsustainable in the medium term.”
Reuters
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