Bottom line: The piracy scandal rocking Alibaba will blow over in a few weeks with minimal longer-term impact, though the company’s stock will enter a downturn over the next 6 months due to overvaluation.
This week could well go down as a turning point for high-flying e-commerce giant Alibaba (NYSE: BABA), whose growing war of words with a top government agency is quickly becoming a major scandal. The increasingly heated exchange has almost completely overshadowed the latest media reports that say Alibaba’s financial arm is preparing to launch a bank later this year. A separate company announcement indicates the bank will use an innovative credit rating system that draws on Alibaba’s huge volume of big data generated from the billions of transactions and other information exchanges that cross over its network.
The fast-growing scandal that has seen the State Administration For Industry And Commerce (SAIC) accuse Alibaba of being soft on piracy finally took a toll on the company’s stock, sparking a sell-off that saw it dip 4.4 percent to close below the $100 mark in the latest session. Even before this scandal, I was predicting for a while that the stock is quite overvalued and is due for a longer-term correction over the next 6 months that could see it re-approach the $68 level of its IPO price.
But all that said, I don’t expect this particular scandal to tarnish Alibaba for too long, and it shouldn’t be a major cause for concern among investors. I previously wrote about the scandal at the start of the week, when the SAIC first released a report showing nearly two-thirds of the products sold on Alibaba’s popular Taobao C2C marketplace were fakes. (previous post)
Now we’re getting more details on the growing spat between Alibaba and the SAIC, including the fact that the latter actually completed its critical audit last summer but delayed releasing it to avoid affecting Alibaba’s record-breaking IPO. (English article) The SAIC has also directly accused Alibaba of being soft on piracy, contrary to the company’s own self-declared zero tolerance policy towards fakes on its sites. Alibaba has made its own detailed response, questioning the SAIC’s methodology and the small sampling size of the audit, among other things.
Meantime, media also reported separately that Alibaba’s financial unit, Ant Financial, will launch a privately-funded bank in May. (English article) Alibaba and Internet rival Tencent (HKEx: 700) were both part of separate groups that received licenses to open private banks, under a Beijing pilot program to bring more private money into sector now dominated by state-run firms. Tencent previously opened its bank, WeBank, earlier this month. (previous post)
WeBank will be an Internet-based institution, and I expect that Alibaba’s new bank, to be called Zhejiang Internet Commerce Bank or Alibaba Bank, will use a similar model. In a separate announcement, Ant Financial gave some hints about how it will rate the creditworthiness for future customers of Alibaba Bank, with the unveiling of its Sesame Credit program. (company announcement)
The new system calculates customers’ creditworthiness using Alibaba’s vast collection of big data, such as transactions and payment histories, from its 300 million registered real-name users and 37 million registered small companies. The product is still in beta testing, but I expect it will become a major tool on the new Alibaba Bank as it and WeBank both aim to target small, private businesses with their lending.
All of that said, I’ll close by restating my earlier view that the current scandal won’t have a major impact on Alibaba, and add that I quite like this new credit scoring program. Alibaba and other Chinese Internet companies have become embroiled in similar scandals in the past, and they almost inevitably make headlines for a few weeks before fading into the background with relatively minimal long-term damage. In this case I still do think that Alibaba’s stock is set for a downturn over the next 6 months, though the reasons are more related to overvaluation rather than this latest scandal.