Alibaba Group Holding Limited’s BABA Taobao was recently put on United States Trade Representative’s (USTR) annual list of world’s most “notorious markets”, for the second consecutive year, along with 24 other online markets and 18 physical markets.

Alleged sale of counterfeit products on the online shopping platform and the challenges faced by the right(s) holders in removing and stopping sale of such illegal products are the reasons  behind Taobao  being blacklisted.

USTR said in its report, “A high volume of infringing products reportedly continue to be offered for sale and sold on Taobao.com and stakeholders continue to report challenges and burdens associated with IP enforcement on the platform.”

Also, the agency recommended ways through which Alibaba Group can improve its position by stating, “Simplifying processes for right holders to register and request enforcement action; making good faith takedown procedures generally available; and reducing Taobao’s timelines for takedowns and issuing penalties for counterfeit sellers.”

Moreover, it stressed on the fact that Alibaba’s efforts to protect brands and IP appeared to be more biased toward global brands, neglecting small and medium businesses.

To defend the company, Alibaba’s President Mike Evans spoke up in a blog post, “In light of all this, it’s clear that no matter how much action we take and progress we make, the USTR is not actually interested in seeing tangible results. Therefore, our inclusion on its list is not an accurate representation of Alibaba’s results in protecting brands and IP, and we have no other choice but to conclude that this is a deeply flawed, biased and politicized process.”

Notably, shares of Alibaba have gained 95.3% in the past 12 months, substantially outperforming its industry’s 61.9% surge.

Our Take

Alibaba dominates the Chinese e-commerce market with a share of 80%. For some time, the company has been taking steps to strengthen its position outside China, especially in the United States. In pursuance of this strategy, Alibaba made its first foray into the U.S. retail market in June this year with the launch of a low-profile website with an American name — 11Main.com — a platform for smaller sellers to hawk their wares.

The company has also dealt with lot of copyright and intellectual property infringement issues in the recent past and has closed 240,000 online stores on Taobao on suspicion of infringement last year. Moreover, the company said that it witnessed a sharp decline in the number of complaints after this move. In its annual report on intellectual property protection in 2017, the company claimed that transactions involving suspicion of fake goods went down to 1.49 out of every 10,000 transactions.

The recent report may have a negative impact on the company’s reputation and its international expansion strategy, as it is making all efforts to strengthen its position in the United States. Also, the decision of blacklisting it will make it more difficult for the company to win the trust of U.S. and global brands.

The e-commerce market in the United States is expected to grow at a double-digit rate over the next few years and if the company wishes to tap this growth, it’ll have to take some steps to improve its position.

Zacks Rank & Stocks to Consider

Alibaba has a Zacks Rank #3 (Hold).

Broadcom Limited AVGO, NetApp, Inc. NTAP and Applied Materials, Inc. AMAT are some of the better-ranked stocks in the broader technology sector, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Broadcom, NetApp and Applied Materials is projected to be 13.8%, 11.3% and 12.7%, respectively.

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