US investors still don't know what to make of Alibaba
The first hour or so following a company's earnings announcement is sort of like a group Rorschach blot test based on the jumble of finances and metrics in a standard earnings report. And what the market saw in Alibaba first post-IPO report shows a clear picture of investor confusion.
Alibaba reported revenue and profit figures that beat Wall Street’s expectations, but showed operating margin deteriorating. In the immediate aftermath, the stock initially fell more than 2 percent from Monday's close. But once active trading began in New York, the stock more than made up those losses, rising 6.5 percent from that intraday low.
That pushmi-pullyu trading reflects the ambivalence that outright investors feel about the the company. It's not simply a battle between bulls and bears. In the case of Alibaba, bullishness and bearishness can exist inside the same investor mind. It doesn't help that Alibaba's first earnings report offered enough evidence to support both views.
Yet now that Alibaba is trading on the NYSE, it's getting harder to simply ignore it. The Hangzhou-based company is growing revenue at roughly the same pace as Facebook, and yet it not only has a larger market value than Facebook, but also a lower P/E ratio. Facebook makes money from ads, and Alibaba in e-commerce, but together they are the only two consumer tech giants of their scale able to grow by 50 percent a year, thanks in no small part to their respective growth in mobile revenues.
Alibaba is more often compared to Amazon, although there are crucial differences: Unlike Amazon, Alibaba has gloriously fat margins. This is because Alibaba is a marketplace that doesn't have majority ownership in its distribution centers, but instead makes money from commissions and marketing services. But like Amazon, Alibaba is now seeing an increase in spending. The company has spent more than $6 billion on growth initiatives so far this year, and it's showing no signs of slowing down the spending. Its EBITDA fell to 50.5 percent from 54.4 percent in the second quarter, a significant drop but still a higher margin than its competitors.
Where is the spending going? Contrary to some reports, it's not going into US expansion. Alibaba mentions the usual areas of spending for a startup: new businesses and stock packages intended to retain key employees. It also wants to get more active in digital entertainment and local ecommerce. Alibaba is spending $1.6 billion to expand its Taobao market into rural areas to, as CEO Jonathan Lu said, help farmers sell their products to a global market.
Alibaba also spent heavily in the last quarter on marketing that could piggyback on the free publicity that an IPO generates. More importantly, it is spending on mobile – on developers to help consolidate the browser (UCWeb) and a recently acquired mobile mapping service (AutoNavi). Alibaba has also been working on its its own mobile OS, following a dispute with Google over Chrome, while offering to subsidize handset makers for phones using its AMOS software.
Is the spending working? Some skeptics have wondered whether Alibaba can maintain its torrid pace of revenue growth without heavier spending on marketing. So far, that doesn't seem to be the case. In fact, Alibaba is showing an Amazon-like ability to churn some of its profits into investments that translate into even faster growth.
Last quarter, Alibaba's gross merchandise value grew by 49 percent, an acceleration from the 45-percent growth rate in the previous quarter. Alibaba said the growth was due to a 52-percent increase in active buyers, many of them on mobile. Mobile transactions make up 36 percent of GMV and 29 percent of revenue. That helped Alibaba's mobile revenue grow more than 1,000 percent to $606 million.
While the numbers Alibaba released show heavier spending, they also argue that spending is yielding even faster revenue growth. But they also did little to reveal what is behind the numbers or assuage the primary - and very real - concerns in most investors minds: the difficulty of assessing the longer term risks the company faces in navigating the demands of the Chinese government, the lack of transparency in the company's operations, and the shadowy and secretive management structure that chairman Jack Ma has assembled.
Those concerns will hang over the company and its stock performance for some time. What's clear from today is that the momentum that Ma and his team have built isn't slowing down, in fact it appears to be gaining steam. At least for now.
Alibaba is like a runaway train. It's charging ahead into new territory so quickly that investors may regret not jumping on in its early days. If they do, it's just a matter of jumping back off before the whole thing derails. After the initial confusion about how to read Alibaba's earnings, it seems many investors are content to take the ride for the time being.