Anticipating the criticism that this post will cause, I hasten to say - I like Alibaba Group (NYSE:BABA) and I like the potential of this company's key market. To prove it, I previously wrote about the growth prospects of China's middle class and the high potential of Alibaba's cloud activity.
But for now, keeping a positive attitude towards the long-term prospects of Alibaba, I wish to draw attention to certain factors that may cause the company's share price to correct in the medium term.
Alibaba's Q2 2016 financial results are definitely good. The rise of dollar income by 48.2% YOY, as well as an increase in non-GAAP EBITDA by 31.9% YOY, testifies to the accelerated growth of the company without sacrificing its profitability.
But the fact that virtually the only indicator consistently showing a slowdown in the last two quarters is the number of Annual Active Buyers is alarming.
The graph below demonstrates the problem. Before the Q1 2016 results, the growth trend in the number of Alibaba's active buyers was consistent with the linear model and envisioned reaching 600 million as early as by 2018. However, after the publication of the Q1 and Q2 results, the most adequate trend model forecasts slower growth in the number of active buyers at the level of 500 million by 2018.
Source of data: Alibaba Group
There was an article in which the fundamental causes of this phenomenon were deeply analyzed, taking into account the level of penetration of Internet in China and the population growth. But what is important is the fact that the inflow of active buyers on Alibaba is slowing down. This means that revenue growth is mainly achieved by increasing the efficiency and activity of existing customers, but this process has objective growth boundaries.
I know, Jack Ma says that 40% of Alibaba's business will be outside China within 10 years, and this means a great potential to attract new buyers in the future, but this is the only plan that does not have an expression in figures yet.
Since the publication of the Q2 statements, Alibaba's shares have risen by more than 25%. At the same time, the P/S ratio has risen to this year's January level. The important thing to remember is that the last time this level was reached was followed by a correction of the price level.
When comparing the P/S ratios of Alibaba and its competitors, it is even more difficult to speak about the adequacy of the current price level.
It is also worth noting that Alibaba's share price has approached the average level of the current analysts' predictions which may cause a partial profit taking.
Source: Yahoo Finance
Since the beginning of September, there has been interest regarding the issue of China's debt. According to the Bank for international settlements, the gap between the debt and China's GDP has broken a new record and at the moment exceeds the risk threshold three times.
The growth rate of China's debt is especially alarming. In 2008, the debt amounted to 147% of GDP, whereas in March this year it already exceeded 255% of GDP.
Whether or not the rapid growth of China's debt may lead to the banking crisis deserves a separate discussion. Nevertheless, this issue does not benefit Alibaba's share price in terms of informational background.
Source: Google Trends
Let me repeat what I've said at the beginning. Alibaba Group is a strong company and it is difficult to overestimate the potential of China. But the 25% increase in the share price after the publication of the Q2 statements has already reflected a large part of the positive financial results, and probably, the shares require a correction before the publication of the Q3 report.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.