Upwardly mobile

How could you doubt me?

In the run-up to Alibaba’s IPO late last year, analysts as well as media pundits struggled to find enough superlatives to express their admiration. But by the middle of this year the praise was waning almost as fast as its stock price was dropping, culminating in a critical article in Barron’s that so infuriated Alibaba bosses that they responded with an open letter.

By late September Alibaba’s share price had slipped below its $68 IPO price to an all-time low of $59.25. The reason: disappointing first quarter results, wider concerns about the slowdown in the Chinese economy, and fears that the expiry of a one-year lock-up on some of the pre-IPO shareholders would lead to a wave of selling.

But the superlatives were out in force again this week after the internet giant published quarterly results that were far better than expected. The strong second quarter figures even led its more enthusiastic investors to predict that its shares could surpass the $120 all-time high they reached in November 2014.

The NYSE-listed stock has now risen 38.9% from its low, closing at $82.30 on Thursday. This means it has vastly outperformed benchmark indices such as the Hang Seng Index and Dow Jones Industrial Average, which are both up roughly 11% over the same period.

The second quarter results revealed a 28% year-on-year increase in global merchandising volume (GMV) to Rmb713 billion ($112 billion) and some analysts now expect it to be the first company to hit the $1 trillion mark within the next five years.

Alibaba’s active user base also rose 26% year-on-year to 386 million, which means its army of buyers now surpasses the US population (318.9 million) in scale.

Migration of users from PC to mobile has also continued apace, with the latter now accounting for 62% of GMV compared to 55% one quarter ago.

What cheered investors, however, is that Alibaba was able to increase its mobile monetisation rate (a measure of how much it makes from sales on its platform) for the first time in five quarters.

This rose from 2.1% in the prior quarter to 2.3%. Meanwhile the monetisation rate on PCs declined slightly from 2.54% to 2.47%. Some analysts believe the mobile rate will trend up until it matches that of PCs, offering a long-term boost to margins. Revenues also rose 32% to Rmb22 billion, 4% above analysts’ consensus forecasts.

Commentators have described Alibaba’s results as a welcome counterpoint to the stream of negative headlines on China’s slowdown. Fortune magazine reckoned it put “all the doom and gloom about the end of China’s growth story into perspective”, while CNBC’s Jim Cramer told his viewers perkily that Alibaba “was a good referendum on how the Chinese consumer is doing” and that its results demonstrated consumption was still “very strong”.

Near-term share price drivers include next month’s rebalancing of the MSCI China Index, which will include US-listed Chinese shares for the first time. Alibaba’s forthcoming Single’s Day mega-sale on November 11 could also have a positive impact, given it has now become the biggest shopping day of the year.

During last year’s Single’s Day bonanza Alibaba processed 278 million orders and made sales of $9.3 billion. Jack Ma launched this year’s campaign by spending Rmb6,150 on a 46kg bluefin tuna from Japan. His purchase was intended to underscore Alibaba’s big push into same-day and next-day deliveries, particularly for groceries.

The company also said that the November 11 event will show how its partnership with Suning is starting to bear fruit. As we reported in WiC292, Alibaba spent $4.5 billion to become Suning’s second largest shareholder in August as a quicker way of building out a stronger distribution network. The plan is to leverage Suning’s stores and delivery stations to distribute goods purchased on Tmall, accept returns and help customers to get products fixed.

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