The latest set of financial numbers from Alibaba Group Holdings (NYSE: BABA) raises lots of questions but provides few answers.
When I went over the latest set of Alibaba numbers posted on ycharts, I came away confused. Some of what I saw there seemed to make little sense, particularly when I compared it with Amazon’s financial data.
Questions Investors Need to Ask about Alibaba’s Financial Numbers
Some serious questions raised by Alibaba’s numbers I have include:
- Why was Alibaba’s revenue for Fourth Quarter 2016 just $21.48 billion? Amazon (NASDAQ: AMZN) reported revenues of $127.99 billion for third quarter 2016.
- Shouldn’t it be a lot bigger after all we are constantly being told that Alibaba is the largest ecommerce solution in the world’s biggest and fastest growing economy? According to Statista Alibaba had 443 million active buyers in fourth quarter 2016, yet it only grossed $21.48 billion in revenues, something does not add up here.
- How was Alibaba to accumulate $20.42 billion in cash and short term investments with just $21.48 billion in revenues during fourth quarter 2016? More importantly how did Alibaba’s cash and short term investments grow from $13.87 billion in June 2016 to $20.42 billion in December? Amazon managed to put $18.35 billion in the bank with $127.99 billion in revenues during third quarter 2016.
- How is Alibaba able to get a net income of $5.709 billion and $10.93 billion in cash from operations from $21.48 billion in revenues? That simply makes sense to me.
- What’s up with the $4.246 billion in cash from financing? Where did it come from I thought Alibaba had spun off its financial services subsidiary Ant Financial.
- Alibaba’s assets of $70.68 billion reported on December 31, 2016, were nearly as great as Amazon’s. Amazon reported assets of $70.9 billion in September 2016. Yet Alibaba’s revenue is far lower than Amazon’s.
Something just does not square here? Is it the difference between Chinese and American accounting methods? Or has Jack Ma developed a radically different business model.
If Ma’s business is everything he says it is, shouldn’t Alibaba be generating revenues similar to those of Amazon or at least much larger revenues? One possibility is that the actual value of Alibaba’s sales are much lower than those of Amazon.
After all Amazon operates in much more affluent developed countries including Europe, the United States and Canada. Most of Alibaba’s business is still done in China, which is a developing country.
Alibaba vs. Amazon
These discrepancies certainly call the proposition that Alibaba might be bigger than Amazon into question. They also raise some serious questions about the nature of ecommerce and investment in it.
It looks as if ecommerce like other forms of retail is a highly regionalized business. A good example of this is the grocery business Kroger (NYSE: KR) only operates in the United States. Kroger succeeds by catering to American customers; it stays out of other markets such as the UK which is dominated by Tesco.
Walmart (NYSE: WMT) is largely a North American company, its forays elsewhere have been near failures. Carrefour confines its operations a few markets such as France, Africa and Brazil.
This probably means Alibaba will dominate China, while Amazon will reign supreme in North America and Europe. There is also a good potential that Amazon will end up dominating Latin America as well. Residents of countries like Venezuela have figured out how to shop at it, without using their nations’ worthless currencies.
One popular trick is to buy gift cards with Bitcoin from US websites. The gift cards are in US dollars; which enables Latin Americans to shop directly on Amazon.
That puts Amazon in a strong position to dominate both developing and developed markets. This prospect bodes ill for Alibaba given Amazon’s sophistication and sheer size.
Is Alibaba a Good Investment?
My take is that Alibaba is not a good investment given all the questions about its business. How much money is it really making, and how much of its business is being propped up by the Chinese government?
One way the Chinese government “helps” companies like Alibaba and Ant Financial is by giving them access to capital from the China Investment Corp. The Investment Corp is a $700 billion sovereign wealth fund maintained by the government of the People’s Republic. Ant has also been access to funds from China’s Social Security system, The Wall Street Journal reported.
Investors would be well advised to stay away from Alibaba until some of these questions get answered. There may not be anything going wrong there, but some of Alibaba’s numbers just don’t add up.