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The high-growth e-commerce company Alibaba Group (NYSE: BABA) is not immune to the slowing Chinese economy. Just a little less than a year ago, Alibaba and its bankers made Alibaba the biggest initial public offering in history, raising $25 billion. Now, the stock has dropped 22% since that first day of trading.
The second-quarter Alibaba earnings report disappointed investors. Revenue rose 28% to $3.26 billion, failing to meet analyst’s expectations of $3.39 billion. Alibaba stock fell on the news, hitting a record low closing price of $73.38 after the earnings report was released on Wednesday.
Alibaba’s recent IPO appeared to be a success, with a 38% gain for investors on its first day of trading. Now investors are wondering if this is yet another disappointing technology IPO, as the stock has continued to drop over the past year.
Source: The Wall Street Journal
Slowing Chinese Economy and Stronger Competition
Alibaba faces a triple threat: the devaluation of the yuan, the slowing Chinese economy and stronger competition.
In the fight to be the top tech company covering e-commerce, online finance and media, the race to the top is intense. The two biggest competitors Alibaba faces are Tencent and Baidu (NASDAQ: BIDU).
Alibaba is focusing on bringing in more imports, as its Chinese customers view the imports as safer, higher-quality products. With a devalued yuan, those imports become more expensive for the consumer. Additionally, there is the big concern that China’s stock market correction is going to negatively impact retail spending.
Management Changes Contributing Factor in Slow Growth
While the competition and economic environment were the main causes for the disappointing earnings report, analysts also indicate that management changes had an effect on the slower growth, which should be corrected in upcoming quarters.
In March, Alibaba changed leadership for shopping platforms Taobao, Tmall and Juhuasuan. The platforms still operate independently from each other, but all now report to Alibaba executive Jeff Zhang for this new business unit that comprises all three platforms. As management and organizational change occur, new policy tends to slow down business temporarily.
Working to Stay Ahead of the Competition
Not all of the news in the most recent earnings report was disappointing. Mobile spending was significantly up, a priority for the company as more customers turn to mobile devices for purchases.
Additionally, the company just announced that it will be investing $4.5 billion in an electronics retailer, for a nearly 20% stake. The retailer, Suning Commerce Group, has a large network of distributors that will support Alibaba’s logistics, allowing it to better deliver products from cities to rural towns.
The two companies are also looking at ways to combine Suning’s 1,600 brick-and-mortar stores with Alibaba services through mobile apps, such as ordering and payments. This investment is consistent with a move toward more offline investments in better infrastructure to gain a competitive advantage in the increasingly competitive e-commerce industry in China.
However, considering the strong threats posed to the company by the slowing economy and intensified competition, it is unlikely that Alibaba is going to continue to experience the same rate of growth.
The Decline Isn’t Over Yet
What is the key takeaway from Alibaba’s disappointing earnings report? No company is immune to the slowing economy in China. Even Alibaba, a company that had exceptional performance immediately following its record-breaking IPO, is struggling.
Alibaba stock hasn’t hit its bottom yet. It is looking more likely that it will hit its IPO price of $68, and even fall below it.
While Alibaba is making moves to improve its competitiveness in the e-commerce industry, the fierce competition won’t be able to handle lower consumer spending as the Chinese economy continues to stumble.
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