Chinese online retailing behemoth Alibaba took the stock market by storm when it went public almost exactly a year ago.
“Today what we got is not money,” CEO Jack Ma said that day. “What we got is the trust from the people.”
But in a devastating new 3000-word cover story for Barron’s, Jonathan Laing struggles to find any redeeming qualities in the company and its stock.
For starters, Laing believes the stock, which closed at $US64.68 on Friday, is worth half that.
…Forty-five of the 52 brokerage analysts covering the company still have Buy recommendations on the stock, according to Bloomberg … The average price target of this crowd: $US95.50, up nearly 50% from the current level. It’s time to get real. A decline of up to 50% looks far more likely. Alibaba shares trade at about 25 times the consensus earnings estimate for the year ahead, and that should be closer to eBay ‘s (EBAY) multiple of 15…
In addition to the rich valuation, Laing warns about competition and discusses the history of Chinese IPOs that went from hot to cold.
However, the bulk of Laing’s screed raises red flags about corporate governance, conflicts of interest, counterfeit goods, and various other questionable business practices.
Particularly disturbing was the suggestion that Ma and his team might actually be making up some numbers, including its very flashy revenue growth stats, which Laing notes are considerably large than other large tech growth companies like Google, Amazon.com, and Facebook.
… Anne Stevenson-Yang, founder of Chinese research firm JCapital Research, has closely tracked the mainland e-commerce industry in general and Alibaba specifically. She finds the growth numbers puzzling. She observes that “Alibaba’s financial reports have broken free of verifiable reality and have reached an escape velocity that doesn’t comport with Chinese government figures of overall retail sales, consumer spending, or online commerce.” Consider this: Alibaba claims to have 367 million users — about the same as one government agency’s estimate of China’s entire online-shopping population. Or this: Alibaba claims its average shopper spends 26% more on its sites each year than the average U.S. online shopper spends on all sites. Does that make any sense, given American consumers’ far greater affluence and ability to avail themselves of a vastly more developed e-commerce ecosystem?
… That $US1,215 average spend at Alibaba also seems high in view of the total average annual per capita expenditure in China, online and at physical stores; that stands at about $US2,260. It strains credulity that the average Alibaba user would spend over half of his consumer outlays on Taobao and Tmall, given that the sites have a negligible presence in categories that account for the bulk of consumer spending, like food and beverages, housing, transportation, home health products, and restaurant dining…
Laing notes that Alibaba denies any of its reported figures have been inflated.
Ma’s rags-to-riches story and disarming charm has probably helped Alibaba sell an image of integrity. But Laing’s take-down of the company is comprehensive and detailed enough that you can’t help but be left with a little doubt in your mind that something fishy is going on at the company.
“In the end, gaudy financial reports can only work for so long before reality intrudes,” Laing writes. “This hard lesson figures to be driven home to Ma and his trusting investors in the coming years, and it won’t be pretty. “
Read Laing’s whole story at Barrons.com.