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Ali-Nada: Chinese e-commerce giant Alibaba not as profitable as it seems

Alibaba Group Holdings Ltd. and Founder Jack Ma As Company Files for U.S. Initial Public Offering of E-Commerce GiantAlibaba Group Holdings Ltd. and Founder Jack Ma As Company Files for U.S. Initial Public Offering of E-Commerce Giant
Alibaba headquarters in ChinaPhoto by Nelson Ching/Bloomberg—Getty Images

Shares of Alibaba (BABA) began trading on Friday at $92, up nearly 35% from the offering price.

Investors have been so excited about the Chinese e-commerce giant primarily because of its perceived profits. Aswath Damodaran, a New York University professor and an expert on corporate valuation, cited Alibaba’s high profit margins—how much of its sales make it to the bottom line—when he argued that Alibaba, unlike nearly every other hot IPO, was not overpriced.

The problem is that Alibaba’s high profit margins are actually a mirage.

When it records sales, Alibaba only counts the commissions it receives for completing transactions between buyers and sellers on its website. As a result, the company’s operating margins (operating profits as a percentage of sales) come to 51%. Wal-Mart (WMT) and Amazon (AMZN), however, report sales as the total dollar volume of goods sold in their stores (for Wal-Mart) or on their site (for Amazon, and Wal-Mart). Compute Alibaba’s operating profits that way and, alakazam, the e-commerce company’s profitability doesn’t look so hot. Its operating profit shrinks to an unimpressive 1.4% over the past 12 months. Even compared to Wal-Mart’s just over 5%, that doesn’t look so hot.

Operating Profit-Alibaba And Others