Alibaba (BABA), China’s largest e-commerce operator, is about a week away from the one-year anniversary of its initial public offering. There’s little to celebrate, however, especially for beleaguered shareholders who witnessed Alibaba stock reach a high of $119 in November, only for it to give up a staggering $140 billion in market value. The IPO market can be brutal.
I know what you’re thinking — this could be an opportunity for investors to get a bargain on Alibaba stock. Kind of like a repeat of what Facebook (FB) did after its disastrous IPO, right?
Of course, the mega headwind is the stumbling Chinese economy, which represents 83% of the company’s revenues. Growth is the slowest in decades, despite the Communist government aggressively employing interest rate cuts, devaluing the yuan and pumping huge sums into equities.
As for BABA, it has been feeling the pinch for the past two quarters, which have failed to meet Wall Street expectations. Oh, and it looks like the third quarter will also disappoint, as management points to a notable decline in spending in China.
Alibaba believes that gross merchandise value will land somewhere in the “mid-single-digits lower than our initial expectations.” It’s not easy to gauge what this will means since the company does not disclose internal expectations. But then again, the last quarter saw GMV fall from a 40% to 34% (on a quarter-over-quarter basis).
At the same time, Alibaba stock is likely to continue to be weighed down by the intense competitive environment in China. One of Alibaba’s most threatening rivals is JD.com (JD), which has an advantageous business model.
Much like Amazon (AMZN), JD.com operates its own system of warehouses, which helps to improve shipping times and the quality of the products. BABA, like eBay (EBAY), is an online marketplace that generally does not hold inventory. If anything, this has become a problem because of counterfeit goods, which is something that the Chinese government has been cracking down on.
But another tough competitor for BABA is Tencent (TCEHY), which operates China’s largest mobile chat service. For the most part, the platform has become quite effective in selling goods.
Interestingly enough, as BABA tries to battle its competitors, the company has also been aggressively moving into other lines of business, such as cloud computing, video streaming, ride-hailing and even the traditional brick-and-mortar electronics retailing segment (with a $4.63 billion investment in Suning).
While such categories have strong growth prospects, they also create massive capital costs. Besides, BABA could easily get distracted from its core business and become stretched too thin.
And finally, there may be additional pressure on BABA stock because of a lockup expiration on a whopping 1.6 million shares, which will come on Sept. 20th. This isn’t to imply that most of this will be dumped, but with the issues in China and the uncertainties clouding BABA, it’s reasonable to assume that there will be some heavy selling from insiders.
All in all, it’s tough to come up with a bullish case on Alibaba stock, other than the fact BABA’s valuation looks somewhat cheap (trading at just 18 times next year’s earnings).
But stocks can remain cheap for a long time, especially when the growth rate falls precipitously and the competition eats into market share, making an investment in Alibaba stock a bit of a risk.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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