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August 14, 2015

Alibaba’s dim financials mask ecommerce giant’s potential

Analysis: China's big tech hope has been rebuffed in US, but better markets beckon.

By Jimmy Nicholls

One hopes that Alibaba was prepared for Wall Street’s quarterly scrutiny when it chose to go public almost a year ago on the New York Stock Exchange.

Either way the reception of the first quarterly results since Daniel Zhang took over as chief executive of China’s biggest ecommerce firm in May will have been painful.

In the three months to June, only the third quarter since the firm went public, Alibaba posted its slowest sales growth for three years. Rather than the $3.39bn (£2.2bn) in quarterly revenues that had been expected by analysts polled by Thomson Reuters, revenues increased to a mere $3.27bn.

Many buttressed the gloomy picture by pointing out that since November Alibaba has lost about $100bn in value, the share price having climbed on November 10 to a high of $119.2 from the initial public offering (IPO) asking price of $68 in an excitable first few months.

Between the close of the markets on Tuesday and the close of the markets on Wednesday Alibaba’s share price fell from $77.3 to $73.5, bottoming out at a record low of just above $71 during the day.

Yet even with these setbacks, many doubt that the firm is on the road to ruin. Headline profits are up year-on-year for the quarter, with net income growing from $2bn to $4.8bn thanks to special items – but even exluding these earning rose 21%..

"Obviously the Chinese economy, which Alibaba is very much going to be affected by, has not been doing all that well, so it’s not surprising," Joshua Bamfield, director at the Centre for Retail Research told CBR.

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"I’m sure that everybody would want them to be better, but I think these are the ebbs and flows of business," he said. "If this was evidence that Alibaba had lost it’s chance and it was being overtaken by its rivals that would be different, but I don’t that that’s the cause."

Certainly the company is having problems. Economic growth in China, as many have pointed out, is the slowest it has been since the 1990s, and Alibaba faced and refuted allegations that some of the products on its market are phoney.

Perhaps also spurred on by tremors in the Chinese stock market, Alibaba has invested heavily in its own country, pushing money towards electronics retailer Suning as a means of extending its logistical reach into China.

Yet perhaps the main reason the company’s financials have been given a stark reception is that Alibaba has not proved to be an "Amazon-killer", as many predicted at the time of its IPO.

Neil Saunders, managing director of research firm Conlumino, said: "In the US retail market [Alibaba] has performed really quite badly."

In June 2014 the company launched 11 Main, a US sales portal, in preparation for its entry into public markets. But it has not proved a success for Alibaba, prompting the Chinese firm to sell the site to US rival OpenSky a year later – though as part of the deal Alibaba retain a 37% stake in OpenSky.

"The thing with 11 Main was it was a very nice site and well curated, but a lot of products were not attuned to American consumer tastes," Saunders said. He added that the site suffered from stock problems as well.

Where Alibaba has found potential is pitching itself as a means of connecting Western brands to the Chinese consumer market, as well as in entering emerging markets where potential for retail growth is much higher than in the mature Western sphere.

Earlier this month Alibaba joined a $500m funding round for the India’s top ecommerce site Snapdeal, in what was a clear challenge to Amazon, which has been pouring money into the country

As Saunders describes it, in markets like India, Russia and Brazil "competition is not quite so tough but there’s really good growth." China’s king of ecommerce has been rebuffed, but it is far from routed.

Image Credit – Alibaba HQ in Hangzhou, China by Hassell

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