[UPDATE: On Sunday, Alibaba published a point-by-point response to Barron’s story, saying it “contains factual inaccuracies and selective use of information, and the conclusions he draws are misleading.”]
Chinese online retailing behemoth Alibaba took the stock market by storm when it went public almost exactly a year ago.
“Today what we got is not money,” CEO Jack Ma said that day. “What we got is the trust from the people.”
But in a new, devastating 3000-word cover story for Barron’s, Jonathan Laing struggles to find any redeeming qualities in the company and its stock.
For starters, Laing believes the stock, which closed at $64.68 on Friday, is worth half that.
… Forty-five of the 52 brokerage analysts covering the company still have Buy recommendations on the stock, according to Bloomberg … The average price target of this crowd: $95.50, up nearly 50% from the current level. It’s time to get real. A decline of up to 50% looks far more likely. Alibaba shares trade at about 25 times the consensus earnings estimate for the year ahead, and that should be closer to eBay ’s (EBAY) multiple of 15 …
In addition to the rich valuation, Laing warns about competition and discusses the history of Chinese IPOs that went from hot to cold.
However, the bulk of Laing’s screed raises red flags about corporate governance, conflicts of interest, counterfeit goods, and various other questionable business practices.
Particularly disturbing was the suggestion that Ma and his team might actually be making up some numbers, including its very flashy revenue growth stats, which Laing notes are considerably larger than other large tech growth companies like Google, Amazon.com, and Facebook.
… Anne Stevenson-Yang, founder of Chinese research firm JCapital Research, has closely tracked the mainland e-commerce industry in general and Alibaba specifically. She finds the growth numbers puzzling. She observes that “Alibaba’s financial reports have broken free of verifiable reality and have reached an escape velocity that doesn’t comport with Chinese government figures of overall retail sales, consumer spending, or online commerce.” Consider this: Alibaba claims to have 367 million users — about the same as one government agency’s estimate of China’s entire online-shopping population. Or this: Alibaba claims its average shopper spends 26% more on its sites each year than the average U.S. online shopper spends on all sites. Does that make any sense, given American consumers’ far greater affluence and ability to avail themselves of a vastly more developed e-commerce ecosystem?
… That $1,215 average spend at Alibaba also seems high in view of the total average annual per capita expenditure in China, online and at physical stores; that stands at about $2,260.It strains credulity that the average Alibaba user would spend over half of his consumer outlays on Taobao and Tmall, given that the sites have a negligible presence in categories that account for the bulk of consumer spending, like food and beverages, housing, transportation, home health products, and restaurant dining …
Laing notes that Alibaba denies any of its reported figures have been inflated.
Ma’s rags-to-riches story and disarming charm has probably helped Alibaba sell an image of integrity. But Laing’s take-down of the company is comprehensive and detailed enough that you can’t help but be left with a little doubt in your mind that something fishy is going on at the company.
“In the end, gaudy financial reports can only work for so long before reality intrudes,” Laing writes. “This hard lesson figures to be driven home to Ma and his trusting investors in the coming years, and it won’t be pretty. ”
3. Mr. Laing attempts to question Alibaba’s reported financials and operating metrics by pointing to the following: (1) Alibaba’s reported number of active buyers compared against statistics published by the CNNIC; (2) “average annual spend per user,” which appears to be a metric derived from GMV and active buyers reported by Alibaba, suggesting the amount of online spend of Alibaba’s shoppers is more than the average US online shopper; and (3) “average user spend per user” on Alibaba’s marketplaces constitutes a significant percentage of per capita retail spending of Chinese citizens.
– First, Alibaba stands by our reported financials and operating metrics.
– Alibaba reported 367 million active buyers for the twelve months ended June 30, 2015, which reflects the number of user accounts that placed an order on our China retail marketplaces during the 12-month period. Mr. Laing appears to compare this to the size of last year’s Chinese online shopping population as reported by the CNNIC. However, according to the latest CNNIC report in July 2015, China’s online shopping population as of June 30, 2015 was 374 million. Given Alibaba’s leading market position, it is not surprising that the number of active buyers on Alibaba’s online marketplaces approaches the 374 million online shoppers most recently reported by the CNNIC.
– The “average annual spend per user”, derived from dividing Alibaba’s 12-month GMV by 12-month active buyers for the past seven quarters (the period referred to by Mr. Laing) was actually RMB6,759 on average, or US$1,056 at the 6.4 RMB/USD exchange rate, as opposed to the US$1,215 calculated by Mr. Laing.
– More importantly, the average annual spend per U.S. online shopper reported by Mr. Laing is clearly incorrect. According to the U.S. Census Bureau, total retail e-commerce sales in the United States amounted to US$298 billion in 2014. Based on our estimate of 179 million online shoppers in the United States in 2014 using Forrester Research projections, the average annual online spend per U.S. online shopper in that year would be US$1,665. This number is 73% higher than the annual average online spend per U.S. shopper claimed by Mr. Laing. The miscalculation of Alibaba’s “average annual spend per user” and the gross under-reporting of average annual spend of U.S. shoppers by Mr. Laing entirely undermine his conclusions.
– The comparison of the average annual online spend of an Alibaba shopper with the average retail spend of Chinese citizens is inappropriate. Shoppers that come to Alibaba’s platforms are early adopters of technology and tend to be urban and more affluent. It is flawed to compare Alibaba’s number to a number derived from simply dividing the size of the Chinese retail economy by 1.3 billion people including 600 million people in the rural villages.
Read Alibaba’s whole response here.