NEW YORK (TheStreet) -- Widespread fake ordering, known as "brushing," at the Chinese websites run by Alibaba (BABA - Get Report) is the latest problem weighing on the stock of China's top e-commerce company. Shares in the company dipped as low as $80.03 Tuesday, their lowest price since Alibaba went public in September, before recovering slightly to close the day at $81.53.
The steep decline came after The Wall Street Journal reported on the brushing problem, and also followed a recent order by the Taiwanese government for Alibaba to withdraw its operations from that country within six months for violating investment rules there. Rival JD.com also reported better-than-expected earnings this week, raising concerns about Alibaba's sales growth.
The purpose of brushing is to boost vendors' apparent sales volume, and consequently, their prominence in listings. Vendors generally pay their fake customers the cost of the goods they order, and then ship empty or worthless boxes, the Journal reported.
Alibaba didn't immediately respond to a request for comment.
The problem is one that's quite familiar to Alibaba's U.S. online rivals, including eBay (EBAY - Get Report), analysts said Tuesday. Alibaba is scrambling to overcome the issue and should be able to, they said, but were split on whether it's even an issue that consumers and investors should be concerned about.
"Merchants creating fake orders to game the Taobao system has been around for a long time," said Wedbush Securities analyst Gil Luria by email, referring to Alibaba's popular Chinese consumer-to-consumer Taobao Marketplace. But he said it was no different from U.S. websites that employ various tools around search engine optimization techniques to gain better positioning in Google's search results.
"This has no impact on consumers, either in China or the U.S., since they don't see any of the fake sales," said Luria. Alibaba will continue to reduce brushing, he predicted. "But it will be very difficult to completely eliminate it, [just] as it is very difficult for Google to completely eliminate bad search results from its search engine," he said.
Rob Enderle, principal analyst at the Enderle Group, agreed that brushing is a problem that Alibaba can overcome. EBay has reduced this behavior significantly over time, and Alibaba can do the same, he said via email. "It is a younger service and is going through much the same learning experience that eBay went through just faster because they are dealing with folks that learned this behavior on eBay," he said, predicting the issue will mostly be eliminated by year-end.
But Enderle sees fake ordering as a potentially more significant issue than Luria does. "It makes it so buyers don't trust the service and they tend to spread this distrust to others who in turn don't use the service either," said Enderle.
Investors may also want to be cautious about investing in Alibaba, said Enderle. "Investing in foreign companies of any type contains unknown risks tied to the geography. China isn't the U.S. and the rules, regulations, and method of enforcement are far different," he said.
But Luria argued that fake sales and inflated volumes should have very limited impact on investors. "Fake transactions don't generate revenue, so they don't have an impact on results," he said. Alibaba's revenue is still growing by about 40% year-over-year, and that's driven by the demand from Chinese consumers, not by the supply from Chinese sellers, he said. Luria rates Alibaba stock as outperform.
Brushing is another sign that Alibaba lacks internal controls over fraudulent activity, said Deborah Greaves, an attorney at Ezra Brutzkus Gubner, who had served as general counsel at jeans maker True Religion (TRLG). "There are a lot of opportunistic listers on there," she said of Alibaba's websites. But counterfeiting stands to hurt consumers -- and brand name manufacturers -- more directly, she said in a phone interview.