INTERNET: Bears Maul Alibaba, No Escape in Sight

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Bottom line: Alibaba’s shares will remain under pressure through at least the end of the year, but could rebound after that and return to their IPO level or higher in 2016 as the bears lose interest and move on to their next victim.

Bears feast on Alibaba stock

Everyone has their good years and their bad ones, and 2015 is definitely shaping up as a year that e-commerce leader Alibaba (NYSE: BABA) would rather forget. After wowing investors with a record-breaking IPO a year ago, the company’s stock has been mauled in 2015 by a large stable of hungry bears, including the latest that emerged over the weekend in a report saying Alibaba stock could tumble further still.

That report from the well-respected financial magazine Barron’s sparked another sell-off for Alibaba’s shares when the new trading week began, pushing them close to record lows, even as the company issued a detailed rebuttal. I’ve had a look at Alibaba’s statement, and many of its points are legitimate though they do seem to miss the big picture.

That big picture is that the growth in China’s e-commerce market is rapidly slowing, and that Alibaba is also facing growing pressure from a field of hungry competitors. At the same time, a major overhang for Alibaba is the issue of piracy.

A government study that uncovered rampant trade it pirated goods on one of Alibaba’s main websites kicked off the company’s downward slide in 2015 back in January. But that story hasn’t finished yet, since the US is set to release its own assessment of Alibaba’s fight in the war against piracy over the next few months. Alibaba has been lobbying hard to make sure it gets a good rating from Washington, but a negative finding could give the bears more ammunition for their attacks on the company.

All that said, let’s look at the latest attack from Barron’s, whose article contained the somewhat sensational headline of “Alibaba: Why It Could Fall 50 Percent Further”. (English article) The article laid out lots of reasons for its headline assertion, citing overvaluation of its share compared to comparable companies, and competition in its home China market, among other things.

Working Overtime

Alibaba’s public relations office was probably working overtime this weekend, as it issued its own detailed response to the story before markets reopened on Monday. Its lengthy rebuttal addressed many of Barron’s major points one-by-one, trying to show how the story’s logic was flawed. (Alibaba statement) Alibaba’s shares still fell more than 3 percent in trade on Monday, the first day after the report came out, though perhaps they would have fallen more without the rebuttal.

The fact of the matter is that many people bought Alibaba’s shares largely on hype last year, betting they would surge on strongly bullish sentiment at the time towards China’s Internet. Those people weren’t disappointed and many made some handsome profits, as Alibaba’s shares soared as much as 75 percent after the IPO. But many of the early bulls have piled out of the stock this year, leaving the bears like Barron’s to set the tone.

I’ll admit that I was an early bear, and spent most of the past year saying that Alibaba’s stock was overvalued and set to come back down to its IPO price of $68. Now the stock has fallen below that price, trading at around $62, and Barron’s believes it could fall as low as the $30 range if we really believe their headline.

So, what does the future really hold for this company? I do believe that Alibaba is entering a new period in its development, and will need to adjust to slower growth for its e-commerce business and a more modest valuation. Its recent investments outside of e-commerce could also start to run into trouble, since many were made during a period of frenzied buying that seemed to lack focus.

The piracy issues could also continue to haunt Alibaba, especially if Washington gives the company an unfavorable rating in its next report. But at the end of the day, I still have to say that Alibaba is a relatively well-run company in a market with extremely good prospects. Accordingly, I expect its shares will ultimately rebound above their IPO price starting sometime next year after the bears lose interest and move onto their next victim.

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