Alibaba (BABA) stock is a little more than a year out from its record-setting U.S. IPO in September 2014. It’s been a tumultuous ride, with shares soaring from $68 per share to $120, then back below $60 a pop.
With shares in the mid-$80s today, BABA stock still trades about 10% below its day-one closing price. And with fresh allegations from its fiercest direct competitor, JD.com (JD), Alibaba’s downside risk remains very real.
BABA stock holders should be aware of the newly filed complaint, and remind themselves that, although shares are on the rebound from September lows, all is not well.
The complaint, filed Tuesday with China’s State Administration of Industry and Commerce (SAIC), concerns Singles Day, the Nov. 11 Chinese sales holiday that dwarfs Black Friday in size and scope.
Last year, BABA alone hauled in $9.3 billion in sales on Singles Day. For context, total online sales on Black Friday were $1.51 billion last year, while Cyber Monday online sales clocked in at $2.65 billion.
Point being: There’s a lot on the line every November 11. And JD.com says BABA has been illicitly convincing merchants to withdraw from JD.com’s Singles Day promotions. If true, this would fly directly in the face of a SAIC regulation enacted in September.
At the moment, these are nothing more than allegations. But if there’s one thing BABA stock owners should know about operating in China, it’s that government agencies can wield incredible power and bring down the hammer on nothing more than a whim.
That tends to happen in communist countries.
Suffice it to say, if there’s meat to the accusations, Alibaba could be in trouble with a government unafraid of taking drastic measures like banning the likes of Facebook (FB) and Twitter (TWTR) from the country entirely. That sort of risk can’t be ignored.
Not BABA’s Only Controversy
Other threats to the Alibaba stock price have also emerged over time, one of the most notable being the prevalence of counterfeit goods on the retailer’s sites.
Gucci and several other luxury retailers filed a lawsuit against BABA back in May, saying the company was complicit in the sale of counterfeit goods on its site. A recent survey from Chinese state news agency, Xinhua, estimates that at least $45 billion in “counterfeit or shoddy goods” were sold through Alibaba sites last quarter alone, according to VentureBeat.
Then there’s the issue of Alibaba’s corporate governance, which has been a concern since Day 1. A select group of insiders controls the appointment of the majority of board seats, and doesn’t have to listen to shareholders if the directors it nominates aren’t approved.
At the end of the day, I’m torn on BABA. On one hand, it just posted a blowout quarter, beating on both earnings and revenue. It dominates e-commerce in China, which boasts the largest middle class in the world.
But its bold willingness to toe the line — and perhaps even play dirty — represents a huge, largely overlooked risk to its prospects as a sustainable business and sound long-term investment. Still too risky for my appetite.
As of this writing, John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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