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Alibaba's Future; Dominant Market Player or Dynamic Growth Engine?
   2015-08-20 09:41:41    CRIENGLISH.com      Web Editor: Liu Ranran

By Zhao Yang & Einar Tangen

Chinese e-commerce giant Alibaba reported second-quarter revenue increase of 3.2-billion U.S. dollars, a 28-percent gain, but it was the lowest rate of revenue growth in more than 3-years, and resulted in the stock falling to its lowest levels since its September 2014 IPO.

Net income was up nearly 150-percent, boosted largely by the sharp rise in the share price of its subsidiary, Alibaba Pictures. But the data disappointed investors, with Alibaba shares falling 6.7 percent on the day, to around 80 dollars per share. Despite an announced stock buyback program of up to 4 billion U.S. dollars, the stock has continued to drift lower dropping below 75.

So what happened?

Alibaba, China's biggest online commerce company, is still making progress. Revenue growth on an industry basis was phenomenal, it is also making inroads in the key mobile market, doing more business with consumers on their mobile platform. The mobile commerce market has been considered an area of weaknesses for Alibaba, as its initial successes were based on the desktop. It is feeling the heat from domestic rivals like JD.com, which despite being vastly smaller, continues to grab market share.

Some analysts think the slower growth is the result of management changes that began last March at the top ranks at Alibaba's shopping platforms. Much has changed for Alibaba in the last year, since its listing. The company appointed a new chief executive, Daniel Zhang and a new president in charge of international expansion, a former Goldman Sachs executive, Michael Evans. Their main growth targets have been international markets, using brands, and domestic growth through developing China's rural e-commerce. The problems here, include an overvalued tech market which makes acquisitions expensive and the logistical costs and difficulties of goods delivery in rural markets.

Others said that after its record high IPO in the US last year, it should have focused more on overseas expansion. The difficulty here is that Alibaba's component pieces while dominant in China are up against established rivals in the international markets like Amazon. In terms of acquisition, the current market conditions makes this expensive and the rapid pace of technological developments makes it risky.

To deal with one part of the puzzle, domestic market growth, Alibaba unveiled a $4.5 billion tie-up with Chinese bricks-and-mortar electronics retailer Suning Commerce Group Co. that will make Alibaba the second largest shareholder of Sunning, holding nearly 20 percent of its stock. At the same time, Suning will invest 14 billion yuan to gain a 1.1 percent stake in Alibaba. Both of the companies hope the partnership will combine their strengths in the online to offline (o2o) consumer market.

People say the main appeal for Alibaba is likely to be Suning's logistics network, which it says covers nine-tenths of China's land mass. If it works it will help both companies compete with JD.com's existing sophisticated in-house warehousing and delivery system. The question is the math, will the Alibaba-Suning tie up allow each to cut costs and better position themselves for growth vs. their rivals, or is it an unwieldy tie-up, which will end in disappointment, as the emphasis switches from bricks and mortar to virtual retail. Of course, one clear win for Alibaba will be Suning's use of Alipay.

JD.com's recent growth in the total value of goods sold on its platforms is likely to have given Jack Ma more reasons for reflection. JD.com's gross merchandise volume went from 21 percent of Tmall's, Alibaba's main e-commerce site, to 42 percent, between June 2014 and 2015, according to Morgan Stanley Research.

The question is, where does Alibaba go from here, with a Price to Earnings (PE) ratio in excess of 47 times, Jack Ma and his team will have to deliver phenomenal growth to justify even its current lower stock valuation, but as the dominant player in the industry, it is getting harder to see where that growth will come from. New growth areas, like its new banking joint venture, are still in the shadows. With their access to real time big data they could be the disruptive technology which changes the banking industry, but will Alibaba focus on running its existing model, which seems to be betting heavily on its existing markets and content, like Alibaba Pictures, or look to new growth engines it can pioneer.

Despite the disappointing revenue, Alibaba's financials still looked strong in absolute terms. Most analysts are saying that for the next five years, Alibaba will continue to be the dominant player in the sector. The question is will Alibaba be a just a dominant market player or a dynamic growth engine. The answer to that question will tell you where the stock is heading.



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