Alibaba looks for new sources of growth as share price dips

Charles Clover
Inside Alibaba Group Holdings headquarters.
Jeff Pohlman | CNBC

As Alibaba's shares edged ever lower this week, Daniel Zhang, chief executive, sought to reassure his employees: "Our values do not waver with the fluctuations in stock price".

After hitting a $119 high in November, two months after its record-breaking $25 billion initial public offering, Alibaba's share price has fallen steadily. It dipped below its $68 list price for the first time on Monday, driven by the combined market storms in China, where it is based, and the US, where it is listed.

Mr Zhang's statement had an eerie ring to it. Three years ago, in February 2012, Alibaba.com, the company's first publicly traded incarnation that was listed in Hong Kong, was taken private via a management buyout. That move was accompanied by a statement that delisting would free the company "from the pressure of market expectations, earnings visibility and share price fluctuations".

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If unchecked, the downward path of Alibaba's stock price could begin to mimic its star-crossed predecessor.

Listed in 2007, Alibaba.com shares hit their highest level on the first trading day, only to skid steadily downwards for five years until its ignominious end.

For Alibaba's senior management and founder Jack Ma, the lesson of the first IPO is simple: always have a back-up plan.

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In the case of Alibaba.com, the fallback was a platform it launched in 2006 called Taobao. An eBay-style online marketplace — on which merchants rent virtual stalls and hawk everything from socks and smartphones to inflatable David Beckham sex dolls — Taobao and Tmall, its counterpart aimed at bigger branded sellers, have come to dominate e-commerce in China. Together, they account for 8 per cent of all retail and are the backbone of Alibaba's second incarnation as a public company.

The problem, according to Wang Guanxiong, founder of Heavy Innovation Lab, a Beijing-based consultancy, is that by the time it went public, Alibaba was already showing signs it had seen its best days. "Alibaba listed at its peak last year. There wasn't much room left to grow," he says.

Taobao's struggles have been illustrated by its disappointing recent results. In the last quarter, gross merchandise value and revenues grew at their slowest rate in more than three years.

Iresearch, a Beijing-based consultancy, predicts that pure e-commerce has started to hit the era of declining returns to scale. From 70 per cent growth registered in 2011, it predicts from 2018 growth will be at 16 per cent annually.

However, Alibaba has made it clear that it can innovate and come up with new business models when the old ones begin to struggle. It is already investing in ideas for a post-Taobao era.

Jack Chen, professor of marketing at Cheung Kong Graduate School of business in Beijing, said that e-commerce is changing and Alibaba is just starting to get behind the new form of online retail.

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"Combined channel" marketing, he says, where customers go to physical stores and restaurants but make online purchases, mainly with smartphones, is growing more rapidly than traditional e-commerce.

"Taobao did its job, which was to go to the stock market and get lots of money. Now Alibaba should probably be looking for new business models for the future," he says.

In August, the company took a 20 per cent stake in electronic retailer Suning. It has also invested in a joint venture website Koubei, aimed at capitalising on the increasing trend of "online to offline" commerce.

But Alibaba's future success may rest with its payments affiliate Ant Financial. The company, which is controlled by Jack Ma and his associates separately from Alibaba, controls Alipay, Alibaba's payments system, and its online bank Mybank. Mr Ma has said Ant Financial may list in China, though he has declined to give a timetable. Some reports have suggested it could be as early as 2017.

Ding Daoshi, founder of Sootoo Research, a China-based analysis research site in China, says Alibaba "was overvalued from the start" but adds that "another reason for the pessimism may be that Alibaba's most profitable and most prospective businesses like Ant Financial will list separately. People see them, not Taobao, as the future of Alibaba".

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Throughout its 15-year history, Alibaba's publicly listed companies have grown in tandem with China's broader economy. Alibaba.com brought Chinese exporters and western wholesale buyers together online, with the intention of tapping into China's massive export-led growth engine.

When it changed its focus to Taobao, Alibaba was pacing into a new fad for China turning into a consumption-driven economy on the back of a growing middle class.

Now, Ant Financial has plugged in to the rise of the mobile internet and the government's strategy of "internet plus". Announced in March, the state wants to use the internet to breathe life into over-regulated and monopolised sectors of the Chinese economy such as finance and transportation,

But even if Ant Financial is the future, Mr Ding says that Taobao and Tmall are still growing rapidly. "We should not count them out, they're still great businesses."