Alibaba’s slow unveiling shows good and bad sides

June 17, 2014

By Peter Thal Larsen

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Alibaba is lifting its veil to reveal both good and bad sides. The e-commerce giant has released more information ahead of its highly anticipated initial public offering. Though some of the disclosures will persuade prospective investors its business is relatively robust, the rapid shift by users to mobile phones is squeezing margins.

Start with the good news. The filing shows that Alibaba’s virtual shopfront is growing much faster than its online marketplace. The value of transactions on Tmall, which is somewhat similar to Amazon from a user’s perspective, doubled in the year to March. The larger Taobao, which resembles eBay, boosted transactions by 42 percent.

The breakdown matters because of Chinese online shoppers’ growing love of smartphones. More than a quarter of transactions on Alibaba’s platforms in the first three months of the year were carried out on a mobile device, up from just over 10 percent a year ago.

The shift is a challenge for Taobao, which doesn’t take a direct cut of the goods sold on its platform, but charges merchants for advertising and preferential placement. That’s harder to do on a small screen. Alibaba’s results show the scale of the challenge: total revenue in the March quarter was 2.2 percent of the value of total transactions. For mobile sales, though, this “monetisation rate” was less than 1 percent.

It would be a mistake to read too much into a single quarter, especially one that includes the Chinese New Year holiday and comes after November’s “Singles’ Day”, when online shopping volumes spike. Nevertheless, investors were clearly disappointed: shares in Yahoo and SoftBank, which own large stakes in Alibaba, both fell.

Alibaba also had little to offer critics of its corporate governance structure. Though it disclosed the names and titles of the 27 members of its controlling partnership, it offered no further details. The proposed quartet of non-executive directors also underwhelmed. Former Goldman Sachs vice-chairman Michael Evans is arguably the only candidate who has to worry about his reputation with institutional investors.

The latest disclosures may blow some of the froth off the more optimistic valuations of Alibaba. However, the company is bound to lift the veil a bit further in the coming months. That gives investors some time to decide whether to buy into the IPO.

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