INTERNET: Alibaba in Painful Period of Adjustment

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Bottom line: Alibaba’s latest sell-off is part of an ongoing correction in the company’s value, reflecting a new era of more realistic expectations from investors.

Bloom continues to shrivel from Alibaba’s rose

After years of basking in the hype of adoring investors who briefly valued it even higher than much-older and far more global rival Amazon (Nasdaq: AMZN), Chinese e-commcerce leader Alibaba (NYSE: BABA) has entered a new phase centered on more realistic expectations for the company. That new phase has seen Alibaba’s stock tumble to a more realistic level this year on a steady series of bad news, including the latest reports that one of its key sales metrics wasn’t as strong as previously estimated last quarter.

But that wasn’t the only bad news for Alibaba in the last few days. Earlier reports this week said the company was cutting back in its college recruitment, in what looked like another sign of slowing growth. (previous post) An Alibaba official seemed to refute those initial reports, only to have a second series of reports emerge that seemed to confirm that the recruitment slowdown was indeed happening. (English article)

If all that bad news wasn’t enough, Alibaba was also in another marginally negative headline this week when media reported a planned sale of the company’s shares held by major stakeholder Yahoo (Nasdaq: YHOO) was running into trouble over tax-related issues. (English article) All the negative noise took a toll on Alibaba’s shares in the first trading day of the new week, as they fell nearly 5 percent to $60.91 — an all-time low and 10 percent below the sale price from their record-breaking IPO a year ago.

Media flocked to the company’s latest woes, the same way they also piled into the Alibaba story when the company was on the rise in the run-up to its record-breaking $25 billion IPO. One report pointed out that the slide in Alibaba’s stock over the last 10 months has wiped out $140 billion yuan in market value, giving the crown for China’s most valuable Internet company to arch-rival Tencent (HKEx: 700). (English article)

Before we talk further about the recent slide and whether it’s overblown, let’s look at the latest headlines led by the most damaging one about the new reduction the in gross merchandise value (GMV) of goods traded on Alibaba’s e-commerce sites in the second quarter. Alibaba had initially estimated the figure grew about 35 percent to $109 billion in the second quarter.

Lowered GMV Forecast

But in the latest update, it said it expects GMV growth to be lower “in mid single digits on a percentage basis” from its earlier estimates. (English article; Chinese article) The wording makes the actual size of the downward revision a bit unclear. But the move spooked investors who already were probably disappointed at the earlier 35 percent growth rate. Of course Alibaba is largely to blame for that earlier disappointment, since its hyperactive publicity machine last year had many people believing it could post much higher growth.

The other major headline involves Yahoo’s plans to sell its large stake in Alibaba, which has hit a snag due to tax implications for the huge profit Yahoo made from the investment. That particular news isn’t really so bad for Alibaba, though at this point investors seem to be looking for just about anything even remotely negative about the company as an excuse to dump its shares.

None of this comes as a surprise to me. I’ve followed Alibaba for more than a decade now, and its founder and Chairman Jack Ma has always been first and foremost a salesman who loves to hype his company to anyone will listen. The only thing that’s changed is the size of Ma’s audience, which has gone from a handful of reporters a decade ago to a huge field of global investors and media who were newly mesmerized by his hype.

At the end of the day I have to return to my frequently repeated assessment, namely that this is not a bad company and is certainly a leader in its area and also a reasonably good innovator. But that said, investors need to focus more on the company’s fundamentals and less on Jack Ma’s hype if they want to gamble with Alibaba, which should help them to understand the true value of this Chinese Internet leader that still holds big potential.

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