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What If the Alibaba IPO Is a Flop?

Yahoo stock is rallying on a mammoth Alibaba stake, but will it last?


Alibaba IPO buzz has reached a fever pitch, with valuations for the Asian internet giant as much as $130 billion.

alibaba ipo baba stockAnd after Yahoo (YHOO) posted disappointing earnings (again) but rose anyway on its Alibaba stake, it was once again driven home to YHOO stock investors just how important this Alibaba IPO is.

But one possibility that many investors might not have entertained yet is the idea that an Alibaba IPO could go poorly, and that Yahoo stock — and even the Internet sector in general — could take a serious hit as a result.

I’m not saying that Alibaba will crash and burn; IPOs are driven largely by sentiment, and it seems hard to extrapolate anything other than enthusiasm about BABA stock given the all the awed and breathless news about its scale and growth lately.

Frankly, I’m pretty sure the Alibaba IPO will go to the moon quickly after hitting the market.

But if you’re interested in the bear case for BABA stock, regardless of how little logic and fundamentals play into the cult sensation of the Alibaba IPO right now, here it is:

China Consumer Power Overstated: Perhaps the biggest concern is the idea of unrealistic expectations for the Chinese consumer. The so-called “China miracle” has been chased by all manner of companies, from Western brands like General Motors (GM) to home-grown consumer stocks, and often the reality hasn’t kept up with the narrative. Consider that in 2012, total sales growth for China’s auto market was a meager 4.3% — significantly less than the 13% pace for U.S. auto sales growth in that same period. Remember, investment and development makes up a massive 50% of China’s GDP, much higher than comparable companies. Bulls contend this means massive untapped consumer power … but there are no guarantees that makeup will change and that upside for the consumer class is as impressive as hoped. That’s something worth remembering as the Alibaba IPO is valued on “guaranteed” growth.

Besides, It’s All Fake Stuff Anyway: While investors often wonder whether we can trust any “official” data from Beijing, given the command-and-control nature of Chinese government, investors also need to be aware of the serious risk of counterfeit products and fraud weaseling into the Alibaba ecosystem. After all, there have been many documented cases of fake, replica and fraudulent goods on American e-commerce portals like Amazon (AMZN) and eBay (EBAY). Frequently these goods originate in China, so just imagine what a home-grown e-commerce site would have to face if it starts relying on thousands of third-party sellers to fuel its growth.

Mobile Monetization Challenges: As Carlos Kirjner of Bernstein Research has pointed out in a recent report entitled “Alibaba Slows as GMV Goes Mobile – Deja Vu,” the Asian internet giant is seeing revenue deceleration and a decline in the  Gross Merchandise Volume, or GMV, of its e-commerce arm. This trend is driven, Kirjner writes, by a shift to mobile traffic that simply doesn’t result in as much buying activity. Furthermore, advertisers haven’t quite adapted to this mobile trend and aren’t spending as much on dedicated mobile ads or keyword campaigns … and when they do after the Alibaba IPO, it won’t be pretty; advertising giants like YHOO and Google (GOOG) have learned that marketers will insist on paying less for these spots instead of the same amount for desktop ads.

Sales Details: Adding to the challenge is that Kirjner has concerns that gross GMV totals could differ materially from net GMV figures — possibly including fees or shipping, and overestimating true volume. The challenge is unique here because Alibaba’s gross merchandise volume is so huge at $270 billion that even a mere 2% variance is a shortfall of more than $5 billion. If the variance is 10%, then that erases sales that total $27 billion — more than the entire revenue of office supplies giant Staples (SPLS). So this clearly is an issue worth watching.

Amazon as a Cautionary Tale: It’s all well and good to record the sales online, but Alibaba also has to figure out the complex infrastructure of fulfillment centers, reliable and rapid shipping, logistics between third-party merchants and everything else that comes with running a business that could do north of $200 billion in sales. Growth may rely heavily on capital investments to expand across Asia, as well as margin pressures if Alibaba faces competition and needs to offer low prices the same as AMZN. It’s easy in theory to grow your sales as an e-commerce site — simply offer a low price and wait for the clicks! But the low margins and big expenses involved with doing this at scale cannot be overlooked, even amid all the hype about the Alibaba IPO.

Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at or follow him on Twitter via @JeffReevesIP

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