Seeking to tamp down investor concerns about its growth rate, Alibaba Group Holding Ltd (BABA) issued its first annual revenue forecast Tuesday, and the market approved by bidding up BABA stock.
The numbers are indeed impressive. Alibaba expects the top line to expand by 48% for the fiscal year ending in March. That’s some impressive acceleration from last year’s growth of 33%. Even after stripping out contributions from acquisitions, BABA projects revenue growth of 36% this year.
That’s impressive growth given the base of BABA’s business, analysts note. After all, this is a company that had revenue of more than $15 billion last year. And how often do you find a company with a market cap as big as Alibaba’s — $190 billion — that is seeing that kind of growth?
This is just what the market needed to hear as anxieties mount over stiff fundamental headwinds and a poor showing for BABA stock since the initial public offering.
The Chinese economy is slowing down and it feels like only a matter of time before it takes consumer spending with it. At the same time, the Chinese government is cracking down on BABA for allegedly turning a blind eye to counterfeit goods and other malfeasance on the part of merchants.
Good Timing for BABA Stock
The forecast does more than soothe investors’ nerves about a potential slowdown. It also gives Alibaba something to use in its war of words with noted short seller Jim Chanos.
About a month ago, the celebrated bear unveiled his position against China’s No. 1 e-commerce company, and it was not pretty. Like many short positions, it’s built on an accusation of shadowy accounting.
Chanos says that Alibaba doesn’t report the costs of its vast delivery operations on its U.S. financial statements. BABA classifies the delivery segment as a separate entity, which wouldn’t be an issue if it didn’t suck up most of the company’s cash flow.
If the costs of the affiliated delivery operations are unknown, then it’s impossible to know the truth about BABA’s bottom line. As Chanos put it:
“What the company is really earning we don’t know. My experience with Chinese companies is that what you don’t know is generally not good news. … What I like to remind people is that Alibaba was a thief.”
BABA’s revenue forecast doesn’t address those concerns directly, but it does do a great service for BABA stock bulls. Without a smoking gun, the market is reluctant to turn on a company set to grow a $15 billion top line by 48%.
Besides, for now at least, investors appear far more worried about economic conditions in China than allegations of complicated accounting shenanigans.
BABA stock has been a big disappointment since it made its debut with the largest initial public offering in history. Alibaba stock closed its first day of trading at $94 a share. Today, BABA trades 17% below that level.
This sort of ambitious growth forecast is just want Alibaba bulls needed to hear, but it still needs to deliver. The next couple quarters are going to be pivotal for BABA stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
