Bottom line: Alibaba’s sharp slowdown in quarterly revenue growth is unlikely to be a fluke, and will put downward pressure on the company’s stock as its post-IPO honeymoon comes to an abrupt end.
When the history books are written, this week will almost surely go down as the one that e-commerce leader Alibaba (NYSE: BABA) would like to completely erase from the record. The company has spent most of the week struggling with a nightmare in the publicity and government relations department due to a piracy scandal, and now it’s just released new quarterly results that showed sharply slowing growth at the end of last year. The perfect storm of bad news wiped nearly 9 percent off Alibaba’s stock in the latest trading session, and for the week it’s down about 13 percent.
So, what exactly happened in this latest report that spooked investors so much? The answer is simple: slowing growth. This kind of slowdown is almost inevitable for any company of Alibaba’s size, though the suddenness and magnitude of the slowdown are a bit surprising. Investors are probably worried the slowdown could also accelerate if Alibaba is forced to crack down on pirated goods being sold on its Taobao C2C marketplace, following a scathing government report released earlier this week that found nearly two-thirds of the goods traded on the site are fakes. (previous post)
The key to understanding the negative market reaction lies in comparing Alibaba’s latest results announcement with the one from the previous quarter. Most worrisome was the slowdown in top line revenue growth. The company posted a 40 percent jump in revenue to $4.2 billion in last year’s fourth quarter, which certainly looks strong on the surface. (company announcement) But the figure was down sharply from the previous quarter, when the company posted 54 percent revenue growth.
The slowdown was even more noticeable in revenue from its mobile business, which accounts for nearly a quarter of Alibaba’s total revenue and is one of the company’s most important future growth engines. Mobile revenue grew more than 5-fold to $1 billion for the quarter, again a very impressive number. But that growth rate was just half of the 10-fold jump the company posted in mobile revenue growth from the previous quarter.
One of the few bright spots was in Alibaba’s profitability. The company posted a 6 percent rise in profits from operations, not an extremely exciting number under most circumstances. But at least the figure moved into positive territory, following a 17 percent drop in the previous quarter. The net profit trend was also in the right direction, with the figure narrowing to a 28 percent drop in the latest reporting quarter from a larger 39 percent drop in the previous quarter.
I’ve written about Alibaba just about every day this week, mostly due to the piracy scandal but also on news that it was preparing to launch a private bank in May. (previous post) All this shows that Alibaba has become quite a complex creature, with many pieces in different business areas. E-commerce is still by far the company’s biggest breadwinner, and will probably continue to be so for at least the next 5 years. So the current revenue trends certainly don’t look too positive over the near- to medium-term.
If Alibaba were a smaller company it might be possible to say the latest slowdown in revenue growth was an aberration and the figure could rebound next quarter. But for a company of this size that relies on billions of small fees for its revenue, such an aberration seems unlikely. It’s somewhat noteworthy that Alibaba’s stock continued falling in after-hours trade even after the 9 percent decline during the day, meaning we may not see any quick rebound in its stock. The shares now trade at about $90, and I expect they’ll see further downward pressure over the next few months and re-approach their $68 listing price as the post-IPO honeymoon quickly ends for this feisty company.