Alibaba’s Lost Password

In the Arabian Nights stories, Alibaba knew the password to get into the bandit’s secret cave. Hong Kong based Alibaba.com, China’s leading B2B e-commerce company, seems to have misplaced the password since its IPO, and can no longer extract the treasures.

Alibaba announced its Q4 2007 results this week. Its annual revenues increased by 58.6% to RMB 2,163 million (~ $303 million), and EPS rose by 358% to HKD 20.41 (~ $2.65) for the year.

Revenue from international marketplace contributed 72% of total revenue and grew by 56% for the year. China marketplace contributed the balance 28% of total revenue, and grew by 65% for the year.

Alibaba makes its money from subscription fees for online storefronts, priority placement of products and other trade related services. Fees for such services range from $2,000 to $10,000 annually. But, it also offers a host of basic services for free and that is where the problem creeps in.

With a registered user base of about 27.6 million users, only about 1% of their users have moved to a fee based service mode. Its 305,500 paid subscribers might be 40% higher compared to the number a year ago, but is still a very tiny portion of its total user base.

The company's efforts to migrate from free services to paid services is not going to be easy given its competitor base of Google China and Baidu (BIDU) which continue to offer free services.

Alibaba’s focus on expanding its international market base is visible with its recent addition of a Japanese web site, creation of European offices and opportunity exploration activities in other countries, such as India and Taiwan. However, none of these efforts play to their strengths per se. For the same reason that Google (GOOG), Yahoo (YHOO), and eBay (EBAY) have been struggling to gain a foothold in China, Alibaba will struggle to gain traction internationally: language and culture.

The company is also entering into strategic partnerships. Recently it established parternships with banks such as the China Construction Bank Corporation, and the Commercial Bank of China which have helped provide loans worth 160 million yen to its SME customer base.

According to the British research firm Analysys International, Alibaba owns 69% of the Chinese B2B market, followed by Global Sources (GSOL), which has only an 8.4% market share. Considering the market base of China’s internet user population of 170 million with an annual growth rate of over 23%, Alibaba does have a huge pie in its pocket. Except, the pie isn’t being monetized very well quite yet.

As a result, the market is not too confident about Alibaba. The stock has been trading at an all time low of HK$12, which is even lower than its IPO offer price of HK$13.50. Alibaba had a spectacular IPO last November. It opened at HK$30, against its offer price of HK$13.50, and closed at HK$39.50, which is more than a 190% gain.

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Comments

[H.W.]

Heard that Alibaba is going to buy a stake in Yahoo over Microsoft?

[C.W.]

Might want to check those EPS numbers, you inflated them by 100 times, the numbers are in HK cents, not dollars! I wish I owned a stock that traded at 12 HKD and has EPS of 20.41 HKD, PE of .58!

[Gautam Ghose]

What would be that US based company, with a business model closest to that of Alibaba?