Back in September, when it first went public, and when it quickly became the talk of the TV studio currently located on the obsolete NYSE floor in New York, a constant source of China buzz, not to mention making Jack Ma China's richest man, Alibaba's market cap soared as high as $250 billion, making it one of the top 10 most valuable companies by market cap.
… and then the headaches began, following news that China's government may crack down on what was dubbed Alibaba's “illegal operations“, which sent its stock sliding to the point where not even one CNBC cheerleader would dare to comment on the same stock that all were previously certain would promptly surge to $120, $130 or higher…. because, you know, momentum.
And then things got even worse, pushing the stock to the lowest level it has seen since its IPO level, and its market cap to under $200 billion for the first time as a market company.
So what is the reason for the latest weakness? Well, according to a report in the WSJ, an unknown amount of Alibaba's “countless” customers – the very basis of the company's ridiculous valuation in the first place – are literally just that: countless. Because they are fake.
From the WSJ:
When Mr. Cui, an entrepreneur in the southeastern Chinese city of Hangzhou, wanted to draw more attention to the hair clips and costume jewelry he sold on the shopping sites of e-commerce giant Alibaba Group Holding Ltd. , he says he turned to fake orders. Faking orders, or “brushing,” as it is called in China, involves paying people to pretend to be customers. It lets vendors pad their sales figures and, in theory, boost their standing on online marketplaces, which often give more prominence to high-volume sellers with good track records.
Typically, vendors pay brushers the cost of the products they are ordering, plus a fee. The brushers place the orders and make payments using that money. The vendors then ship boxes that are empty or full of worthless trinkets, while the brushers write glowing reviews.
The practice is considered a form of false advertising, which is prohibited in the U.S. and China. Chinese sellers found doing so face fines and restrictions on their business. But Mr. Cui, who asked to be identified only by his last name, said he relied on fake orders because he felt there was no other way for his products to be seen.
Brushing puts Alibaba at risk of further regulatory scrutiny following its $25 billion initial public offering in September, and calls into question the volume of transactions actually conducted on its platforms, a metric analysts cite in saying it is the world's largest e-commerce platform. Alibaba says it doesn't condone fake transactions and that it scrubs them from reporting on merchandise volume, which amounted to 1.68 trillion yuan ($274 billion) for its two main shopping platforms, Taobao and Tmall, in the fiscal year ended March 2014.
