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Did Alibaba Trick Analysts and Investors Over Growth and Valuation?
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Alibaba Group Holdings Ltd. (NYSE: BABA) had a massive initial public offering (IPO). Its stock soared, and Wall Street analysts set very high price targets in their coverage of the Chinese online seller of everything under the sun. Just like the rest of the world, analysts often see things in a manner that does not work out.
The question that 24/7 Wall St. has is whether Wall Street was duped into thinking that Alibaba would have higher growth rates than reality. After all, Jack Ma and his team knew much of the growth metrics throughout much of the fourth quarter. Still, Ma may have covered himself even before the IPO priced.
After Mark Cuban warned that Alibaba should not have been allowed to come public in the United States, we cannot help but wonder if this is going to lead to a feeling by analysts that they were duped by the company into certain growth assumptions. That being said, Ma did warn up front that shareholders are not the first concern. Ma was quoted even before the IPO as saying, “Customers first, employees second, and shareholders third … I can see that investors who hear this for the first time may find it a bit hard to understand.”
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Alibaba’s IPO price was at $68 on September 19, and its shares closed at $93.89 after the first trading day. The range on that first day was $89.95 to $99.70. After that, the stock tread water before rising to above $100 on November 3. It then hit a high of just over $120 by November 13. Now the shares trade around $90.
24/7 Wall St. has given more detailed notes from Oppenheimer, Wells Fargo, Credit Suisse and Merrill Lynch on the Alibaba front. We have also given summaries from a half-dozen more analysts.
Oppenheimer maintained its Outperform rating, but the firm cut its price target to $112 from $133. The firm said:
Our positive thesis on BABA continues to build on its robust GMV growth and future monetization upside potential. We think its lower-than-expected blended take rate is attributable to management’s intention to maintain market share among intense competition, via reducing merchants’ costs and improving user experiences. Also, on January 30, the CEO met with the top official of SAIC and agreed to crack down on counterfeit goods together. This should remove some concerns, in our view.
Wells Fargo maintained its Outperform rating, but the valuation range was cut to $110 to $113 from a prior $123 to $126 range. Its lower target was based on lower e-commerce market multiples. The firm said:
Alibaba reported solid bottom-line results, though revenue missed our estimates and consensus, sending the stock down 8.8%. Core demand metrics were strong, including gross market value growth and active user growth.
Credit Suisse maintained its Outperform rating but lowered its price target to $113 from $118. The firm’s report said:
“We revise down expected 2016 earnings by 0.6%. We turn more conservative in near-term take-rate assumptions, but maintain our view that monetization rate continue to increase with better buyer experience and mobile ad roll-out. We see weakness as good buying opportunity. Our discounted cash flow-based valuation of $113 implies 43.8x CY15E, 33.5x CY16E, and 26.8x CY17E diluted adjusted earnings per share.
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Bank of America Merrill Lynch maintained its Buy rating, but the firm cut the price objective to $116 from $132. The firm said:
As management emphasizes its focus on company’s long-term prospect after the IPO, the company’s margins and monetization rate continue to be in transition: both are down year over year due to 1) investment in marketing and IT to support new initiatives like local services, expansion in lower-tier cities and mobile search and map; 2) rising proportion of mobile GMV (42% of retail GMV) which has a lower monetization rate than PC due to fewer ads; 3) less aggressive monetization in its PC ad ranking system, which focuses more on relevance and long-tail keywords to protect user experience and to retain advertisers as some competitors are offering free or low cost marketing services to attract new merchants.
Other analyst calls seen were as follows:
If you wonder even further, what does it tell you when class action suits are filed this soon after an IPO? The firm Robbins Geller Rudman & Dowd has filed a class action suit against Alibaba, and that was after a January 29 release by the Pomerantz Law Firm in which it was said to be investigating claims on behalf of Alibaba investors.
Ma might be able to say he warned up front that investors are not the highest priority of the company. And then there was our warning ahead of the IPO that the risks and disclosures section of the prospectus was an unheard of 40 pages long.
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