Alibaba signals downtrend on scrutiny over food business

Alibaba Group Holding Ltd. (BABA) hit a new milestone in business by surpassing sales transaction of 3 trillion Yuan ($463 billion) in the fiscal 2015, which ends in March. The company also announced that in another two years time, its total sales volume would surpass that of US retail giant Wal-Mart. The total sales volume of Wal-Mart currently stands at approximately $476 billion, in another two years. Following the news, the shares of Alibaba hit a 2016 high of $79.68 in the NYSE.

The record volume takes Alibaba far ahead of its competitor, JD.com (JD), in China. The sales volume of JD.com in the fourth-quarter was $22.2 billion. The reputation of Alibaba is marred by counterfeit goods. The company is currently in the process of resolving the issue by bringing in well-established brands from overseas.

CCTV English

The e-commerce company has understood that the urban market is near saturation and future growth can come from rural markets only. Thus, in an effort to sustain growth, the company has begun a program to have a presence in more than 600,000 villages. The company is investing about $1.7 billion in distribution centers spanning across 100,000 villages. In this regard, the Taobao store of Alibaba is an effort to deliver goods to customers in villages without courier penetration. The company is also actively encouraging the villagers to sell their products online.

The company’s financial arm is currently planning to spend about $155 million to steer college graduates as entrepreneurs running their own online businesses. While everything seems to go as planned in favor of the company, some events in the recent past have put a question on the issues it will likely face in the coming weeks.

Last week, a contemptuous editorial was published by Wujie News, against the Chinese President Xi Jinping. The publication is owned by SEEC Media Group, Alibaba and the government of Xinjiang. The news blamed the Chinese Premier of running the country like an autocrat, without taking the views of the Communist Party into consideration.

This was followed by a wave of restrictions against the media. The news was promptly removed.

Very soon, China’s state run media ran a documentary accusing Alibaba for the fake goods sold through its website. Two government agencies have also started scrutinizing Alibaba’s online food delivery business named Ele.me. The company is the market leader in the business with a 33.7% market share. The government says that Alibaba is allowing unqualified food vendors to do business through its platform.

Thus, considering the recent events, in the short-term, the share price is expected to remain range bound with a bearish bias.

Technically, the rally would face stiff resistance at 85 levels. Support can be expected at 73. The stochastic reading of 91 indicates a highly overbought situation.

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