Alibaba Can't Defy China Slowdown Forever - Wall Street Journal
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Aaron BackThe Wall Street Journal
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Alibaba BABA 0.21 % is making the best of a tough situation. That may not ultimately be enough for shareholders.
For a while, China’s e-commerce market seemed immune to the broader Chinese economic slowdown. That is no longer the case. Growth in gross merchandise volume, the total amount of transactions hosted on Alibaba’s marketplaces, is clearly feeling some impact.
Alibaba’s GMV rose 23% from a year earlier in the December quarter. That is down from 28% growth the previous quarter, and represents a sharp slowdown from nearly 50% growth in 2014. Besides economic factors, a crackdown on fake goods may also be taking a toll.
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Alibaba is overcoming some of this drag through better financial execution. The monetization rate, or the amount it earns from each transaction it hosts, rose for the second straight quarter. Expanding the ad space available, especially on mobile screens, seems to have had an impact. This allowed revenue to rise faster than GMV, by 32%.
The question for investors is which trend will prove more powerful over the long run. If revenue keeps slowing, due to the deteriorating economy or rising competition from rivals like JD.com, JD -1.52 % investors might still be disappointed.
What’s more, it is unclear how much higher the monetization rate can go. At 2.98%, it is already close to its peak level of 3.05%, reached in the fourth quarter of 2013.
Alibaba shares are hovering at just above their initial public offering price. Nonetheless, shares aren't exactly cheap. Alibaba is trading at 36 times estimated 2016 earnings, according to FactSet, compared with 28 and 25 times for rivals Tencent and Baidu, respectively.
That valuation gives Alibaba plenty of credit for its ability to mitigate headwinds. Overcoming the drag of China’s slowdown will be more challenging in the quarters to come.
Write to Aaron Back at aaron.back@wsj.com
