13 December 2018
Alibaba has surpassed Walmart in gross merchandise volume for the first time, but its share price has continued to drop. Photos: Reuters, Bloomberg
Alibaba has surpassed Walmart in gross merchandise volume for the first time, but its share price has continued to drop. Photos: Reuters, Bloomberg

Alibaba struggling to convince US investors despite record GMV

Business owners are quite wary of the distinction between a good turnover and a good profit. For listed-companies, a good profit does not necessarily boost the share price.

Alibaba said on Wednesday that its gross merchandise volume (GMV) reached 3 trillion yuan (US$463.6 billion) last year, surpassing the giant US retailer Walmart for the first time.

It also shows that the retail sector has gone through great changes, and online e-commerce has already taken the dominance.

Nevertheless, investors are not that excited, and the share price has dropped more than 5 percent to US$77.3 per share, nearly 20 percent lower than the closing price during its US market debut in September 2014.

In fact, Walmart remains the world’s largest retailer in terms of market capitalization. Its market cap is US$216 billion, more than 10 percent higher than Alibaba’s US$195 billion.

Alibaba’s net profit is estimated to have jumped 2.2 times to US$12.5 billion last year, equivalent to a P/E ratio of 15 times. The valuation is likely to drop to 12 times in the current fiscal year.

By contrast, Walmart reported a 10 percent drop in net profit to US$14.7 billion, translating into a P/E ratio of 14.7 times. The ratio is expected to rise to 17 times in the new fiscal year.

It seems quite odd that investors have granted higher valuation to the old-economy retailer.

By comparison, other internet giants like Google, Tencent, Facebook and Amazon have a P/E ratio of 27, 30, 35 and 129 respectively. That has given us some idea of the normal valuation range for new-economy leaders.

Alibaba has not been favored by US investors for three main reasons. First, investors value the future prospect or growth potential of internet companies the most. It’s more difficult for companies with the size of Alibaba to maintain high growth rate.

In fact, its GMV growth rate has been declining from 55 percent to 23 percent in the past three years.

Meanwhile, Alibaba already accounted for 10 percent of China’s retail sales of 30 trillion yuan as of last year. That means there is limited upside in the future.

Second, Alibaba is not a supplier; it built various online shopping platforms like Taobao, Tmall, and so forth for buyers and sellers. Its GMV represents the total transaction value in these platforms.

It’s widely suspected that some sellers create massive fake trade to boost their credit ratings and lure buyers.

It’s estimated that as much as 30 percent of the GMV figures for China’s e-commerce sites stem from fake transactions.

Also, there are loads of knock-offs being sold on China’s online shopping sites, which face great litigation risks.

Foreign investors who have limited knowledge of the situation in China usually overreact to such risks. That’s why they demand a big valuation discount for Chinese e-commerce companies.

In addition, many western investors have become so terrified because China has experienced several market meltdowns since its economic slowdown in 2014. They are worried the Chinese economy might suffer from a hard landing.

In this case, many US-listed Chinese stocks have fetched very low valuations. That has prompted a great number of these companies to seek privatization and re-listing in China.

Alibaba, the leading player in the nation’s e-commerce industry, is set to bear the brunt.

The share price of Alibaba may remain weak unless the company finds new growth engines like cross-border e-commerce, internet finance, big data, etc.

Also, if western investors become less pessimistic about China’s economic outlook, Alibaba’s share price could get a boost.

This article appeared in the Hong Kong Economic Journal on April 7.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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