Too upbeat on Alibaba

The Wall Street Journal Asia
By Andrew Peaple
7 May 2009

Facing a slowdown, Alibaba.com is transforming its business model. Investors already seem certain of its success.

Fees for internationally focused customers were (cut) by 60% in November. Alibaba.com provides listings for mostly Chinese manufacturers to find buyers at home and abroad, taking membership fees in return.

It's also pressing ahead with a $30 million marketing push this year and expanding its workforce by upwards of 25%.

The higher costs and lower revenues per user are naturally hitting operating profit margins. They fell to 34% in the first quarter from 40% in 2008. Further declines are likely. The company doesn't expect them to widen again until 2011.

This is a long-term process, something perhaps lost on investors who've pushed Alibaba.com's shares up 84% so far this year. They now value the stock at more than 50 times expecting 2009 earnings.

Alibaba.com certainly has a strong foundation. It has negligible debt and a high market share – more than 50% of China's current business-to-business e-commerce market.

And there are signs the fee cut is working. Paying members increased by nearly 50,000 in the first quarter to 482,000, a record rate. Deferred revenues, a good measure to judge Alibaba.com by, rose 28% from a year earlier.

But it will take some time to see a firm pattern of response from customers. So far, the company estimates, just under half of its subscribers are moving to the cheaper package when existing deals expire.

How much this revenue-cannibalizing will be outweighed by overall membership growth isn't yet clear. That uncertainty is on top of continuing doubts over the outlook for Chinese exporters.

None of this is to say that Alibaba.com has its strategy wrong. It's simply too early to have inspired such confidence among investors.