http://www.barrons.com/articles/alibaba-objects-but-we-stand-by-our-cover-story-1442636537

Alibaba Objects, but We Stand By Our Cover Story

The Internet giant says our article “contains factual inaccuracies and selective use of information.”

Sept. 19, 2015 12:22 a.m. ET

Alibaba Group Holding sent a letter to Barron’s objecting to our cover story of Sept. 14, “Alibaba: Why It Could Fall 50% Further.” The letter, printed in full below, maintains that the story “contains factual inaccuracies and selective use of information.” After thoroughly reviewing the letter, Barron’s stands by the story, with the exception of one error. Our discussion of that error appears at the end of the letter.To the Editor: 
Your Sept. 14 article with the sensational headline “Alibaba: Why It Could Fall 50% Further” lacks three key ingredients—integrity, professionalism, and fair play. We take strong issue with the reporting about the state of our company, and we feel compelled to set the record straight.

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1. Jonathan Laing’s story contains factual inaccuracies and selective use of information, and the conclusions he draws are misleading. Set forth below are some specific examples of these errors.

• Laing suggests Alibaba’s stock price could fall 50% from the current level, which is also the headline of the article. The rationale given by Laing is based on his incorrect calculation that our consensus forward P/E multiple is 25 times consensus earnings “for the year ahead,” compared witheBay’s 15 times.
• Laing refers to our P/E multiple “for the year ahead,” which should be 2016, but he cites the 25 times P/E multiple on analysts’ 2015 consensus earnings. That is misleading. If the P/E multiple referred to is “for the year ahead” (i.e., 2016), then Alibaba’s P/E multiple on analysts’ consensus for 2016 earnings would be approximately 20 times.
• Comparing Alibaba’s P/E multiple to eBay’s P/E multiple is flawed because eBay does not operate in China. A more relevant comparison would be with our large-cap Chinese Internet peers. The P/E multiples of Tencent and Baidu on consensus 2015 earnings are 31 times and 24 times, respectively.
• Laing cites his reading of history on our Hong Kong publicly traded B2B subsidiary from 2007 to 2012 as a “historical guide” to BABA stock price, but he ignores several important facts: 1) most businesses suffered during the global financial crisis of 2008; 2) from calendar 2007 to 2011, our B2B subsidiary grew revenues from 2,163 million renminbi to RMB6,417 million, and adjusted net profits from RMB619 million to RMB1,713 million, in each case representing a nearly threefold increase; and 3) during the period from the B2B listing in November 2007 at 13.50 Hong Kong dollars to when it was privatized at the same price in June 2012, the Hang Seng Index of Hong Kong’s largest bellwether stocks was down by 34%.

2. Laing suggests that competitors are “eating into the market shares of” Alibaba’s position as the leader in e-commerce in China. The sole proof Laing provided for this assertion was “a study by a Financial Times research service” of online shoppers.

• Laing cites a research study that relies on a survey of a limited number of respondents and for which none of the geographic base, methodology, or the party commissioning the research has been publicly disclosed to our knowledge.
• Our Taobao and Tmall marketplaces combined have an unrivaled leadership position in e-commerce in China. In the Tmall B2C segment, our market share according to iResearch is more than twice the share of the next closest player.

3.Laing attempts to question Alibaba’s reported financials and operating metrics by pointing to the following: 1) Alibaba’s reported number of active buyers compared against statistics published by the China Internet Network Information Center, or CNNIC; 2) “average annual spend per user,” which appears to be a metric derived from gross merchandise volume and active buyers reported by Alibaba, suggesting the amount of online spend of Alibaba’s shoppers is more than the average U.S. online shopper; and 3) “average user spend per user” on Alibaba’s marketplaces constitutes a significant percentage of per capita retail spending of Chinese citizens.

• First, Alibaba stands by our reported financials and operating metrics.
• Alibaba reported 367 million active buyers for the 12 months ended June 30, 2015, which reflects the number of user accounts that placed an order on our China retail marketplaces during the 12-month period. Laing appears to compare this to the size of last year’s Chinese online shopping population as reported by the CNNIC. However, according to the latest CNNIC report in July 2015, China’s online shopping population as of June 30, 2015, was 374 million. Given Alibaba’s leading market position, it is not surprising that the number of active buyers on Alibaba’s online marketplaces approaches the 374 million online shoppers most recently reported by the CNNIC.
• The “average annual spend per user,” derived from dividing Alibaba’s 12-month GMV by 12-month active buyers for the past seven quarters (the period referred to by Laing) was actually RMB6,759 on average, or US$1,056 at the 6.4RMB/USD exchange rate, as opposed to the US$1,215 calculated by Laing.
• More importantly, the average annual spend per U.S. online shopper reported by Laing is clearly incorrect. According to the U.S. Census Bureau, total retail e-commerce sales in the U.S. amounted to US$298 billion in 2014. Based on our estimate of 179 million online shoppers in the U.S. in 2014 using Forrester Research projections, the average annual online spend per U.S. online shopper in that year would be US$1,665. This number is 73% higher than the annual average online spend per U.S. shopper claimed by Laing. The miscalculation of Alibaba’s “average annual spend per user” and the gross under-reporting of average annual spend of U.S. shoppers by Laing entirely undermine his conclusions.
• The comparison of the average annual online spend of an Alibaba shopper with the average retail spend of Chinese citizens is inappropriate. Shoppers that come to Alibaba’s platforms are early adopters of technology and tend to be urban and more affluent. It is flawed to compare Alibaba’s number to a number derived from simply dividing the size of the Chinese retail economy by 1.3 billion people, including 600 million people in the rural villages.

4. Laing’s comments on Alibaba’s strategy shows his lack of understanding of e-commerce and Alibaba’s strengths and strategies as we clearly and transparently communicated during our initial public offering, as well as in our annual report and our quarterly earnings updates. He wrote that “many of Alibaba’s investments beyond online shopping—in areas like media, entertainment, logistics, and cloud computing—seem aimed more at beguiling investors than improving earnings.”

• Laing misses the fundamental point that logistics is a critical component of online commerce. Alibaba is committed to the overall customer experience, so we will continue to invest in improving the delivery experience. Most importantly, rather than owning the hard assets and taking on large head-count increases ourselves, our primary logistics strategy is to partner with other companies to leverage their expertise and scale, such as the 14 major courier-service partners we work with,Haier Electronics’ logistics division RRS for large appliances, and our recently announced strategic alliance in logistics and omni-channel retail with Suning, one of China’s largest electronics retail chains with 1,600 stores.
• Alibaba is in the cloud-computing business because we have proprietary technology and scale advantages that grew out of our core business. Laing doesn’t seem to acknowledge that in the U.S., Amazon.com has a large and growing cloud-computing business.
• Media and entertainment is a new business for Alibaba. We are in the early stages of development because China’s media and entertainment market has historically been much smaller than the U.S. We believe in the future growth potential of media and entertainment in China and have clearly communicated that we would invest and assume losses in the early cycle of this business.

5.Laing claims that “shareholders of Alibaba Group don’t actually own the businesses that make up the company…” referring to “virtual ownership” of Chinese companies through the “variable interest entity,” or VIE, structure.

• These statements are misleading. Alibaba shareholders own shares in a holding company that holds 100% equity stakes in its Chinese operating subsidiaries. As of the end of fiscal-year 2015, Alibaba generated 86% of revenues through, and 95% of the company’s assets were held in, these wholly owned subsidiaries, not in the VIEs. Through ownership in the shares of Alibaba, our shareholders own these assets and have direct access to the cash flows generated from the operations of the wholly owned subsidiaries through dividends.
• Chinese regulations limiting foreign ownership require certain assets, such as an Internet Content Provider License, to be held in entities under the legal ownership of Chinese citizens. These entities are called “variable interest entities,” or VIEs, because contractual arrangements are in place to ensure that Alibaba Group receives the economic benefits of such VIEs, and the results of the VIEs’ operations are consolidated into the financial statements of Alibaba Group. VIE structures are commonly used by overseas-listed Chinese companies, including our large-cap peers, Baidu and Tencent.

6.Laing attacks the corporate governance of Alibaba by impugning the personal integrity of Jack Ma on the issues of 1) Alibaba’s partnership model in nominating a majority of its board of directors; 2) Alipay divestiture in 2011 (four years prior to the Alibaba IPO); and 3) related party transactions. Again, these attacks are not supported by the facts.

• The facts relating to the director nomination rights of the Alibaba Partnership, the reason and history of the Alipay divestiture and related party transactions are fully disclosed in Alibaba’s IPO prospectus, and we stand by these facts.
• Ma has publicly stated, as disclosed in the Alibaba IPO prospectus, that he will reduce his shareholding percentage in the holding company of Alipay to not exceed his shareholding in Alibaba Group immediately prior to the Alibaba IPO, and this reduction will be effected in a manner by which neither Ma nor any of his affiliates would receive any economic benefit.
• Ma will not personally benefit from the related party transactions referred to in Laing’s article, including his 40% interest in the general partner of Yunfeng Capital (where he has committed to donate any distributions to the Alibaba charitable foundation) and the transaction withWasu Media Holding.

7. Laing’s reference to “Alibaba’s alleged failure to crack down on the sale of product knockoffs on its sites” ignores the industry-leading efforts Alibaba has undertaken to make anticounterfeit its No. 1 commitment to online consumers and intellectual-property owners.

• The sale of knockoff goods by third-party merchants is a risk that all operators of third-party transaction platforms globally face, including eBay and Amazon. Given the size of Alibaba’s marketplaces, with millions of sellers and hundreds of millions of product listings, it is not surprising that counterfeiting concerns (similar to those that have been raised concerning other third-party platform operators) have been made about Alibaba.
• Alibaba has made excellent progress in intellectual-property-rights protection, including our strict takedown procedures, setting up legal precedents with law enforcement, and establishing cooperative relationships with more than 1,000 major brand owners and several industry associations to assist in our efforts.
• In 2013 and 2014, Alibaba spent over RMB1 billion (approximately US$160 million) fighting counterfeiting and enhancing consumer protection. In 2014, Alibaba worked with Chinese authorities in over 1,000 counterfeiting cases. As a result of this collaboration, 400 suspects from 18 counterfeiting rings were arrested, while 200 bricks-and-mortar stores, factories, and warehouses involved in the production and sale of counterfeits were closed.
• Alibaba continues to cooperate with relevant government agencies, such as China’s product safety regulator, State Administration for Industry and Commerce, or SAIC, to enhance the effectiveness of our procedures and to identify and combat counterfeiting at its source in order to safeguard the interests of consumers.

The facts above provide a clear and compelling case for the lack of integrity, professionalism, and fairness of Laing’s reporting. We urge you to issue a correction, and we stand ready to discuss this with you at any time.

Jim Wilkinson 
Senior vice president and head of International Corporate Affairs, Alibaba Group Holding

Editor’s Note: Barron’s made an error in our discussion of annual spending per shopper, a topic Wilkinson discusses in section No. 3 of his letter. We substantially understated the amount the average American online shopper spends at Websites each year. The figure that Wilkinson provides, $1,655, is probably about right. It does not, however, change our conclusion on the topic: Alibaba’s data suggest its customers spend strikingly large sums on its sites compared with U.S. online shoppers. Our reading of Alibaba’s data on transaction volume and user population, which we stand by, suggests its average user spends $1,215 a year on the sites, nearly 75% of what U.S. shoppers spend on all sites. That’s surprising, given that per-person economic output in the U.S. is seven times what it is in China.

One point of clarification: The “year ahead” price-to-earnings multiple we cited is based on estimated earnings for the coming four quarters, not the calendar-year 2016.

http://www.barrons.com/articles/alibaba-why-it-could-fall-50-further-1442036618

Alibaba: Why It Could Fall 50% Further; The Chinese Internet giant’s stock has been plunging amid an array of problems. Expect more trouble ahead.

JONATHAN R. LAING

September 12, 2015

It has been a wild ride for investors in Alibaba Group Holding.

After the largest-ever initial public offering of stock, a year ago this week, shares of the Chinese Internet giant surged 75% in their first two months—only to begin a long spiral downward. They fell all the way to the initial price of $68 and then some, recently trading at about $64. The descent probably isn’t over. Alibaba’s shares could fall much further as China’s economy struggles, competition in e-commerce increases, and the company’s culture and governance draw scrutiny.

Just last week, Alibaba (ticker: BABA) disclosed that its transaction volume will be lower than expected for the quarter ending this month. Growth in volume already had declined markedly—to 34% in the June quarter from 50%-plus in recent years. The company, which runs two huge retail Websites, cited slower consumer spending, and that may only worsen as China’s economic growth drops to its lowest pace in six years.

Founder Jack Ma is aiming for two billion users of his Websites, more than five times the current level. Wall Street’s faith in him is testimony to his magnetism. Photo: Qilai Shen/Bloomberg

Alibaba, which trades on the New York Stock Exchange and sports a market value of $160 billion, still has plenty of fans. To them, the company founded and led by the charismatic Jack Ma remains the ultimate China Dream stock, surfing the wave of surging Chinese middle-class growth and the eventual transition from the nation’s export model to one favoring domestic consumption of goods and services. Forty-five of the 52 brokerage analysts covering the company still have Buy recommendations on the stock, according to Bloomberg. Five rate it Neutral, and just two rate it a Sell. The average price target of this crowd: $95.50, up nearly 50% from the current level.

It’s time to get real. A decline of up to 50% looks far more likely. Alibaba shares trade at about 25 times the consensus earnings estimate for the year ahead, and that should be closer to eBay ’s (EBAY) multiple of 15. Both outfits match sellers and buyers on the Web, and eBay has ample emerging-market exposure. We’d also give the earnings estimates a haircut—Wall Street’s optimism looks overdone in the face of the challenges.

History certainly isn’t on Alibaba’s side. Widely hyped Chinese IPOs like Alibaba often flame out like supernovas as growth rates and profit margins suddenly decline. That’s what happened to a business-to-business predecessor to Alibaba Group. On the Hong Kong Stock Exchange in 2007, Ma’s Alibaba.com rocketed from its IPO price of 13.50 Hong Kong dollars to nearly HK$40 several months later before beginning an ugly descent to under HK$10 over the succeeding five years. The company was ultimately taken private in 2012 at HK$13.50.

Fresh selling pressure on the stock could emerge later this month when Alibaba’s final IPO lockup expires. Some 1.6 billion of its 2.5 billion shares will be available for sale for the first time. The company has taken pains to assure shareholders that the owners of 1.45 billion shares have pledged not to sell their holdings. Moreover, the company is planning a $4 billion stock buyback to counter any selling pressure. But it’s still unclear exactly how it will play out.

THERE’S NO QUESTION THE COMPANY faces some big issues. Competition from Chinese e-commerce rivals like JD.com (JD) is heating up quickly, eating into the market shares of Alibaba’s two main Websites—Taobao, which allows small merchants to sell their wares to Chinese consumers, and Tmall, a platform for global brands and retailers to reach the same folks.

Many of Alibaba’s investments beyond online shopping—in areas like media, entertainment, logistics, and cloud computing—seem aimed more at beguiling investors than improving earnings. Youku Tudou (YOKU), a YouTube-like site for videos, lost some $140 million last year. Alibaba’s movie-production arm also runs in the red. As a result of such performances, the two retail Websites are still thought to account for the huge bulk of profits.

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Perhaps more troubling is the seeming improbability of the growth numbers reported by the company over the three fiscal years ending in March.

The value of transactions moving across its platforms—$409 billion in the 12 months through June—has compounded at an annual rate of 55% for the past three fiscal years, while Alibaba revenues have surged yearly at an average of 56%. That kind of growth is exceptional, well ahead of the three-year average revenue growth of Google(20%), Amazon.com (23%), andFacebook (49%).

Anne Stevenson-Yang, founder of Chinese research firm JCapital Research, has closely tracked the mainland e-commerce industry in general and Alibaba specifically. She finds the growth numbers puzzling. She observes that “Alibaba’s financial reports have broken free of verifiable reality and have reached an escape velocity that doesn’t comport with Chinese government figures of overall retail sales, consumer spending, or online commerce.”

Consider this: Alibaba claims to have 367 million users—about the same as one government agency’s estimate of China’s entire online-shopping population. Or this: Alibaba claims its average shopper spends 26% more on its sites each year than the average U.S. online shopper spends on all sites. Does that make any sense, given American consumers’ far greater affluence and ability to avail themselves of a vastly more developed e-commerce ecosystem?

Alibaba Vice President of International Media Robert Christie denies that the company’s figures are inflated in any fashion. He attributes the gaudy growth numbers to such factors as the rapid adoption of smartphones for online buying and the company’s fast user expansion into second- and third-tier cities and into China’s hinterlands. Maybe so, but those growth numbers are still awfully large.

SO, TOO, IS Jack Ma’s fortune. Even after the stock’s sharp pullback, Ma has a net worth of almost $30 billion, according to Bloomberg, and the stock’s descent doesn’t seem to have impinged on his lifestyle. Recent published reports say he was the purchaser of a trophy property in Hong Kong overlooking Victoria Harbour for a reported $193 million. This would be in addition to his recent $23 million acquisition of a home and large acreage in upstate New York, replete with a maple-syrup operation.

Wall Street’s faith in Ma is testimony to his undeniable magnetism and salesmanship. His life story, which he has related with gusto in numerous interviews and speeches, is spellbinding. A poor boy from the city of Hangzhou, he hung around tourist hotels in the city in order to learn idiomatic English by taking American tourists on free tours of the city. One of them even prevailed upon him to change his first name from Ma Yun to Jack because the latter was easier for Westerners to pronounce.

By the late-’90s, he relates, he had become entranced by the commercial potential of the Internet, despite, by his own admission, having no programming ability or technical knowledge. It was in his cramped apartment near a Hangzhou lake in 1999 that he met with 17 friends to map out a course whereby Alibaba could become pre-eminent in the then-fledgling Chinese e-commerce industry. The apartment has since become a corporate shrine to which company executives often retire for meditation and brainstorming.

Jack, the name he uses in all SEC filings, is a consummate performer, projecting disarming humility and a beguiling vision of Alibaba’s future. The 51-year-old has a self-deprecatory sense of humor, often comparing himself physically to the Spielberg character E.T. But there’s nothing humble about his ambition for the company—to become the platform for two billion users worldwide, up from the claimed 367 million Chinese who use Alibaba today.

Growth isn’t the company’s only message. In its SEC filings and public statements, Alibaba talks endlessly about integrity, transparency, passion, and always putting the interests of the customer first. But some merchants and government officials have raised questions about the company’s commitment to such values.

Complaints about Alibaba’s alleged failure to crack down on the sale of product knockoffs on its sites have been chronic throughout its history. A lawsuit in May filed by Kering (KER.France), the parent of Gucci and Yves Saint Laurent, in New York Federal District Court is seeking monetary damages and an injunction against Alibaba for alleged violations of trademarks and racketeering laws arising from counterfeit goods selling on Alibaba sites. The company says the suit is without merit and is fighting it. More recently, a hectoring letter was sent to Ma on the same subject by the American Apparel & Footwear Association.

Although the U.S. Trade Representative removed Alibaba from its list of “notorious markets”—markets rife with counterfeit merchandise—in 2012 in light of progress made on that score, Alibaba’s home regulator, the State Administration for Industry and Commerce in China, last January released a “white paper” charging the company with an alleged failure to properly control the sale of counterfeit goods and other alleged illegal activities in Alibaba’s Chinese marketplaces. The company denied the charges in the white paper, and mysteriously, the paper was retracted within days.

When Barron’s asked the company about these accusations, Alibaba’s representative replied, “We are committed to the protection of intellectual property rights to eradicate counterfeit merchandise that may appear on our marketplaces.” The company says it uses sophistical algorithms and random checks, among other things, to identify malefactors and expunge them from its sites.

ALIBABA’S TREATMENT of its shareholders, meanwhile, hardly meets best-in-class corporate governance. The company itself acknowledges in SEC filings that the interests of founder Ma and his confederates may conflict with the interests of Alibaba shareholders.

Just consider how the company is structured. Shareholders of Alibaba Group don’t actually own the businesses that make up the company; Ma and his close associate Simon Xie do. Under a legal agreement with Ma and Xie, the fruits of the businesses, including cash flow and profits, are transferred to the holding company. But the Ma team gets to select a majority of the holding company’s board of directors.

This form of “virtual ownership” for shareholders of Chinese companies like Alibaba is aimed at getting around government prohibitions against foreign ownership of Chinese companies in industries deemed “sensitive,” like the Internet. The fact that Alibaba Group is some 90% owned by Americans and other overseas investors makes it a Wholly-Foreign Owned Enterprise under Chinese law. Yet Alibaba is allowed to operate in China because its businesses are entirely owned by mainland Chinese.

At least in one instance, Ma was widely criticized both in and out of China for, in the words of the respected business magazine Caixin, “failing to abide” by that contract with Alibaba shareholders. This occurred in early 2011, when Ma quietly transferred ownership of fast-growing payment processor Alipay out of a Chinese company that was part of Alibaba Group’s “virtual ownership” structure and into a separate private partnership that Ma controlled, thereby eliminating Alibaba Group’s right to Alipay’s earnings. The reason for the move, according to Ma, was that a change in licensing requirements by Chinese banking regulations required nonbank payment processors to be domestically owned.

That claim seems somewhat flimsy since Alipay was domestically owned both before and after the transfer. What’s more, Ma made the transfer of Alipay without the approval of the Alibaba board and without the knowledge of the company’s two largest shareholders, Yahoo! (YHOO) and Japanese conglomerate SoftBank Group(9984.Japan). Both kicked up a storm.

There have since been several settlement agreements due to changing circumstances. Today, Alibaba Group is entitled to 37.5% of profits from Alipay (which is now part of Ant Financial Services) in perpetuity. And should Alipay or its parent go public, which is widely expected, the holding company would be entitled to the same 37.5% equity value.

Estimates of Alipay’s value run as high as $50 billion. So the difference between Alibaba’s former 100% interest in Alipay and today’s 37.5% piece is huge. In the latest SEC filing, Ma says he will reduce his unspecified ownership share in Ant Financial Services by giving them to employees of Ant and Alibaba. But it would be more sporting of him to give those shares back to Alibaba shareholders whence the stock came rather than to employees of Ant and Alibaba.

A RAFT OF RELATED-PARTY transactions involving Ma and the company are also cause for concern. For example, Ma has 40% control of three investment funds sponsored by an outfit he helped found called Yunfeng Capital; these funds show up as co-investors with Alibaba in a number investments. It is probably confusing for Ma to keep track of his roles as both a general partner of the funds and as Alibaba CEO. Alibaba and the funds may at times have different investment goals. Alibaba’s annual report informs us of Ma’s intention to “donate all distributions he may receive by virtue of his 40% indirect interest” in the Yunfeng funds to the Alibaba Foundation charity.

Nor do Ma and friends seem to be shy about using Alibaba Group’s balance sheet to make private investments. Case in point: an April 2014 investment made by a partnership controlled by Ma and online-gaming magnate Yuzhu Shi. The deal for a 20% interest in the Internet streaming company called Wasu Media Holding(000156.China) seemed fairly straightforward initially. Alibaba Group financed the purchase of the shares by a third party, Simon Xie, a limited partner, by giving him a $1 billion loan.

But a year later, the optics changed. The $1 billion primary loan was assumed by an unnamed Chinese bank, but Alibaba was hardly off the hook. It provided the partnership with a $300 million loan to cover the interest payments that Xie faced on the bank loan. Alibaba also had to deposit $1.1 billion in the same bank as collateral on the loan. So in all, Alibaba shareholders are on the hook for $1.4 billion to finance the private investment made by the Ma partnership.

In its filings with the SEC, Alibaba concedes that this transaction raises the specter of potential conflicts of interests between the company and Ma, Xie, and the other general partner, Shi. Among other things, “there is no assurance that Simon [Xie] will have sufficient resources to repay the loan in a timely manner, or at all,” an Alibaba filing says.

An Alibaba spokesman attributed the complex structure of the Wasu deal to government prohibitions against foreign investments in the nation’s media and entertainment industry. This claim seems stretched. Wasu trades on the Shenzhen Stock Exchange, where foreigners can purchase its shares. And Alibaba itself, though deemed a foreign-owned enterprise, was able to buy a 16.5% interest in Youku Tudou, another Chinese Internet streaming company, which trades on the New York Stock Exchange. Alibaba declined to discuss those issues.

So, much of the China Dream magic surrounding Alibaba rests on the turbocharged growth in transaction volume, or GMV, that the company has reported in recent years. And here, some incongruities are troubling.

Take, for example, Alibaba’s claimed growth in user numbers, which has compounded at an annual rate of 39.1% over the past four years, from a June 2011 total of 98 million to 367 million as of June 2015. Yet over roughly the same period, a biannual national survey conducted by the Chinese Internet Network Information Center, an official agency, shows that China’s online-shopper population has a compound growth rate of 23.5%, rising from 173 million in June 2011 to 361 million this past December. An Alibaba spokesman says the agency’s figures are too low.

The discrepancy in growth rates could perhaps be explained if users were increasingly gravitating to Taobao and Tmall, Alibaba’s two main Websites, at the expense of their competitors. But that doesn’t conform with other surveys. A study by a Financial Times research service showed that, as of this year’s first quarter, 44.9% of respondents most regularly use JD.com, surpassing the 36.3% favoring Tmall and nearly catching up to the 50.6% notched by Taobao. Four years ago, there was a yawning gap in popularity between Taobao and JD.com where the former waxed the latter by about 52% to 28%.

THE OTHER COMPONENT OF Alibaba’s GMV, average annual spend per user, likewise invites a measure of skepticism. For the past seven quarters, that number has stood at about $1,215, well above the $963 annual average for U.S. online shoppers. But the U.S. is significantly more developed and affluent; per capita gross domestic product in the U.S. is about 7.5 times that of China.

That $1,215 average spend at Alibaba also seems high in view of the total average annual per capita expenditure in China, online and at physical stores; that stands at about $2,260. It strains credulity that the average Alibaba user would spend over half of his consumer outlays on Taobao and Tmall, given that the sites have a negligible presence in categories that account for the bulk of consumer spending, like food and beverages, housing, transportation, home health products, and restaurant dining.

Alibaba attributes the apparent discrepancy on the less-developed bricks-and-mortar retail sector in China forcing consumers onto the Internet, not only for aspirational purchases, like fashion goods, but also household necessities. Still, you’d have to buy a lot of light bulbs and detergent to close the gaps in those numbers.

PART OF ALIBABA’S ALLURE, particularly to offshore investors, who constitute nearly 90% of its owner base, is that the company casts a wide shadow over so many digital areas beyond e-commerce, such as social media, chat, instant messaging, smart television, and entertainment.

In fact, the company has been on an investment rampage since 2014, spending billions. Yet it has in the main kept its investments stakes under 50%, meaning it doesn’t have to include the results of those businesses in its operating profits. That has insulated its results from the losses coming from businesses like Youku Tudou and Alibaba Pictures Group (1060.Hong Kong).

Things could get tougher for Alibaba and Jack Ma. User growth is no longer matching the extraordinary pace of recent years, and economic times are getting harder. Also, competition from JD.com and others is forcing Alibaba to abandon its “asset light” model of little inventory and few warehouses. It’s building warehouses, fulfillment operations, and delivery networks to match the faster delivery times of rivals.

In the end, gaudy financial reports can only work for so long before reality intrudes. This hard lesson figures to be driven home to Ma and his trusting investors in the coming years, and it won’t be pretty.