I must confess that I have been very skeptical about Alibaba Group Holding (NYSE: BABA) since it first went public in the U.S. last year. Yes, Alibaba is the world’s largest online retailer with a stranglehold on Chinese ecommerce and an impressive presence in India. Yet it is a minor player in developed regions like the United States, Europe and Japan, where most of the world’s money is. It also depends on the Chinese government’s willingness to keep foreign competitors like Amazon.com Inc. (NASDAQ: AMZN) out of its home market, something that could change overnight if the regime in Beijing collapses.
My skepticism is partially based my personal experience with Alibaba’s U.S. operation, Ali Express. When I used Ali Express, I found it clunky and poorly designed when compared with American sites like Amazon.com and Walmart.com. Its search features did not work and seemed outdated.
Alibaba Has a Lot of Cash
This being said, Alibaba does meet some classic value criteria. The most important of these is that it generates a lot of cash. The free cash flow numbers show us that Ali is capable of moving a lot of cash through its accounts. Ali reported a free cash flow of $3.17 billion on Dec. 31, 2014. That was an increase of $710 million over December 2013, when Alibaba reported a free cash flow of $2.46 billion.
What’s more Ali did very well over the 2014 holiday season. It reported a free cash flow of $1.181 billion in September 2014 that increased to $3.17 billion by December. Therefore Alibaba made $1.36 billion during the holiday season. This indicates that like some other online businesses like Amazon.com, Ali has a lot of float.
Ali has also shown some impressive revenue growth. When it first started trading last year, Alibaba reported a TTM revenue of $8.6 billion for March 2014 that grew to $9.38 billion in June, $10.33 billion September and $11.51 billion in December. Alibaba’s revenue grew by $2.91 billion over the course of a year, which shows us that it does have momentum.
That gave Alibaba a quarterly year to year revenue growth rate of 38.39%, over twice that of Amazon.com, which reported a revenue growth rate of 15.08% on March 31, 2015. Alibaba’s growth rate also far exceeded that of eBay Inc. (NASDAQ: EBAY), which reported a rate of 4.36% on March 31, 2015, Best Buy NYSE: BBY), which reported a revenue growth rate of 2.82% on January 31, 2015, and Staples (NASDAQ: SPLS), which reported a negative revenue growth rate of -3.69% on Jan. 31, 2015.
Online Retail Is Growing but Facing Serious Disruptions
Okay, so what do these figures tell us? Well, first that there is a lot of room for growth and new players in online retail in the United States and around the world. UPS (NYSE: UPS) reported that the total volume of items it shipped increased by 2.8% during the first quarter of 2015. That would indicate that more packages are being shipped, a large percentage of which are online retail orders.
Second it is real easy to build up market share and income in the realm of online retail but difficult to keep it. Alibaba’s revenues and Walmart’s (NYSE: WMT) incredible growth in online sales last year demonstrate it is real easy to build up a lot of ecommerce traffic fast. Walmart reported that its online sales increased by 21% in the third quarter of 2014 alone.
Staples’ decline and the low levels of growth at big name e-tailers like eBay and Best Buy proves it is difficult to maintain momentum. Even Amazon has reported that its momentum is slowing; in March 2014 Amazon reported a revenue growth rate of 22.84%. The situation at Staples in particular proves how hard it is for an online retailer to grow once it has saturated its market.
That situation could bode well for Alibaba, particularly if it is willing to make the major infrastructure investments necessary to create a serious online retail presence in North America. Some segments of the online retail sphere, including office supplies, clothes, electronics, small appliances, cleaning supplies and business to business seem ripe for disruption right now.
There is also room for deep discounters with strong brand names and good reputations in the sector, as Walmart’s success has demonstrated. That could be an opportunity for Alibaba with its strong relationships with Chinese suppliers.
Alibaba faces a problem that most North Americans and Europeans are unfamiliar with it: it lacks a reputation and a strong brand name. One solution to this problem could be to buy an existing brand with a good reputation, such as Sears.com or eBay. Sears.com in particular seems ripe for the plucking given the sorry state of affairs at its parent company, Sears Holdings (NASDAQ: SHLD).
Is Alibaba a Value Play?
Okay, all that being said, the big question still remains here: Is Alibaba a value investment? My answer is not at the moment for two basic reasons.
First Alibaba is definitely overpriced at $84.92 a share. It is a good $30 to $40 stock trading at more than twice its value. My prediction is that sooner or later it will fall back down to earth, perhaps losing as much as half of its value. When that happens, Alibaba could go from being overpriced to a bargain.
Second Ali is making a lot of money, but it is doing a poor job of keeping its cash. Alibaba reported a net income of $5.09 billion in June 2014; by December 2014 that income had fallen to $4.37 billion. The inherent volatility of the online retail sector may make it difficult to maintain a steady income and, more importantly, float.
y need to develop other streams of steady revenue in order to give itself float. Ali might need something like Amazon Web Services to keep a steady cash flow coming in.
My take is that Alibaba is a potential value investment. At some point in the near future, Alibaba could become a good value play, but it is not there yet.
Disclosure: your favorite blogger owns shares of eBay and plans to keep them for a long time because he thinks they have value.