It has, for once, been a tough week for Alibaba. The Chinese online retail giant posted disappointing growth figures in its Q2 2015 report last week, leading some experts to suggest that ‘Alibaba Mania’ is over. Alarm bells have been ringing in markets worldwide, too, over China’s surprise currency devaluation, and a predicted rough patch for its once-surging economy.
But is it really the end of Alibaba’s stratospheric growth? Yes, its current $75 price represents a 28% loss in value since its September IPO – the biggest in history. The company, too, posted a 28% revenue increase, which would have most corporate boards reaching for the champagne.
But Alibaba is a firm which, since 1999, has risen to a $162.7 billion valuation. “When investors are buying your stock on the assumption of hyper-growth,” writes the New York Times’ Jim Kerstetter, “any return to normality can be taken as a sign of weakness.” Shares bounced back by 0.09% at the close of market yesterday, as founders moved to enact a $4 billion share buyback plan. But it is tough to say whether that will have any significant effect.
Alibaba looked all set to enter the U.S. market until June, when it sold 11 Main, and three smaller companies – a move that signaled an end to its possible assault on Amazon. The Chinese market is, after all, huge: by the end of H1 this year, it was valued at $265 billion.
The Wall Street Journal this week suggested that Alibaba’s retail dominance was on the slide, as strong competition chips away at its 80% Chinese online shopping market share. JD.com, the country’s number two player, launched a ‘US Mall’ this June, which features American brands such as Converse and Jeep. Its share price has risen 19% this year. Alibaba has fought back by agreeing deals with over 160 labels, it expects will drive more than $4.6 billion in transactions this year.
Ma, meanwhile, has decided to spend his way out of danger. Last week Alibaba spent $4.6 billion on a 19.99 stake in retailer Suning, whose shares jumped 10% on the news. The move, said Alibaba vice chairman Joseph Tsai, would “leverage on Suning’s physical infrastructure.”
Among Alibaba’s acquisitions in the past 12 months have been production houses Chinavision and Bale, and video portals Youku and Vmovier. It has also worked alongside sometime rival Tencent to invest in smart-TV firm Whaley Technology.
“Alibaba’s investmenst are very long term oriented and in that context may end up being successful,” says Gil Luria, stocks analyst at Wedbush Securities. “Investments in places like the U.S. and India, and products such as media, are more likely to contribute to growth in the 3-5 – maybe 5-10 – year timeframe. These investments may pay off in those timeframes by allowing Alibaba to expand into new markets and introduce new products, but will not help their current growth which has been decelerating over the last few quarters.”
“Alibaba is aggressively entering new segments with the Whaley investment in smart TVs and the investment in retailer Suning,” adds Hong Kong-based analyst Andrew Collier. “Both may take time to pay off. Arguably, Sunning is the more important investment as it gives Alibaba a strong toehold in local logistics, which – like the battle cable TV fought over the last mile decades ago – is the biggest challenge for online retailers.”
Smart TV is going to be a major challenge and possible problem for Alibaba and its partner, Tencent,” Collier adds. “China’s state TV dominates advertising and is not going to sit quietly by the sidelines while smart TV takes share. They will have no issues enlisting the help of the State Administration of Radio, Film and Television (SARFT) to block any big market share gains among other players. Just look at online payments — the regulators are forcing the private forms to bow down to the state banks.”
Alibaba’s stutter comes amid a growing problem for the Chinese economy at-large.
China has, for years, been attempting to build an economy based on exports and investments in huge infrastructural projects – rail, roads, housing. In recent years, however, exports have fallen by 8.3%, alongside global trade. The devaluation is a sign that China is looking to services and light manufacturing for its future. But the move is unlikely to cause any big change in its fortunes, say analysts.
China’s annual economic growth is still 6-7%, which would represent success for any developed nation. But, similar to Alibaba, China’s economy has been characterized by startling numbers. Since the 1980s growth has usually hit around 10% per year. Perhaps, suggests economist David Dollar, China’s jobs market is beginning to creak at an ever-increasing number of young people: “They’re turning out seven million college grads a year,” he told Business Insider. “It’s hard to grow good jobs for all of them.”
Moody’s forecasts GDP growth for the G20 nations to slow to 2.7% this year, a 0.2% drop from last term. China’s issues represent a large chunk of the slowdown, it says. The group expects Chinese growth to fall from 7.4% last year to 6.5% next, halting after that around the 6% mark.
Commodities worldwide have suffered a slump, as some predict another global financial meltdown. Only this time China won’t be the world economy’s savior, but its depressant. Already stunned by tighter U.S. regulations, the Chinese 1.9% devaluation on August 11, the most in two decades, has knocked emerging markets backwards, especially in Africa.
“If finance was a boxing match, the referee would be getting ready to intervene in emerging markets,” says the Financial Times’ U.S. markets editor Robin Wigglesworth.
“The devaluation was an inevitable step,” says Collier. “There are likely to be further moves to devalue the currency, although given the current backlash, they may hold their fire until the last quarter of 2015.
“The Chinese economy has been slowing for years but the decline was masked by the RMB4 trillion ($625 billion) stimulus in 2009,” he adds. “Since then, the cash is running out, and the government is trying desperately to keep GDP from plummeting. But the days of big debt fueled growth are over. So inevitably, retailers like Alibaba are going to feel some pain. But given their reach, and the advantages of online distribution, they are likely to be in better shape (less revenue declines) than some brick and mortar players in China.”
None of the bad news stopped Alibaba founder and chairman Ma from purchasing a $193 million, three-story property in Hong Kong’s exclusive Victoria Peak district this week. With a net worth of $22.7 billion, the former English teacher is the second-richest person in China behind real estate tycoon Wang Jianlin, and seventh on Forbes’ ‘Richest People in Tech’ list.