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Alibaba Is No Cave Of Wonders

|About: Alibaba Group Holding Limited (BABA), Includes: AMZN

Summary

Alibaba has an unproven business model with a weak history of profitability.

Going public has made everyone's slice of the pie smaller.

Adding $8 Billion worth of new debt will only make the future more difficult.

I am now officially bearish on Alibaba Group Holding, Ltd. (NYSE:BABA) after having found the income statement for 2013 on their official website. According to the statement, gross profit margins as well as net income declined last year. That's even as revenues from their mobile volume increased by over 1000%. Diluted earnings per share during the same period fell by 41.8%. Now I know some of that dilution is due to the company going public, but those numbers are just awful. What can be inferred from this kind of performance is a business that hasn't yet found itself.

On the company's investor site you'll find several diagrams under the financials heading that are full of what the company's future holds in terms of "Gross Merchandise Volume". It's an imaginary number based on assumptions that the company can grow successfully. But growth comes at a cost. Borrowed money creates interest expense, and interest expense erodes profitability further.

I don't like what I'm seeing here. I agree that there is a lot of untapped potential in bringing Chinese goods to market. However, investors shouldn't be so quick to throw money behind the first group that appears to be doing it right.

Alibaba raised $25 Billion when it went public in September, and an additional $8 Billion through bond issues that were sold last week. So the company is collecting even more cash to burn. But for what purpose? Alibaba's founder, Jack Ma says that it is to "Monetize" the larger Chinese marketplace, but what does that actually mean? What we're seeing here is that the company is unable to monetize their current smaller marketplace, so why should giving them an additional $33 Billion help?

Even established veterans in the online market like Amazon (NASDAQ: AMZN) are having trouble monetizing their business and generating profits. Investors tend to be eager to get into new kinds of technology in order to exploit potential growth, but I would not be an investor here until Alibaba can prove that they have the capacity to grow profitably. Of course, the future is wide open, and the company could very well figure itself out. However, the way things are right now, Alibaba is shaping up to see a complete failure to thrive. As well as more money than it knows what to do with.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.