Wall Street still sour on Alibaba's shares
SAN FRANCISCO — Alibaba investors may be feeling a bit disoriented by the deluge of recent news about the company.
Some has been bad, especially a warning Tuesday that third-quarter sales volume on the company’s e-commerce sites is tracking below expectations.
Some has been good, including plans for a new sports-related business and a report late last week that the company's two largest individual shareholders — chairman Jack Ma and vice-chair Joseph Tsai — are looking to borrow money against their stakes, rather than sell some of them off.
And on Wednesday, Yahoo announced that the Internal Revenue Service declined to endorse its plan to spin off its huge Alibaba stake on a tax-free basis.
Alibaba shares jumped over 5% on the news. (They are down about 0.4% in pre-market trading Thursday.) That leap came even though two analysts cut their price targets on the company, a welcome move after the volatile stock scraped new lows earlier this week.
Yet amid the cross-currents that have buffeted the shares, one thing has remained consistent: Wall Street continues to sour on Alibaba’s profitability this year.
The analysts who cover Alibaba shares have reduced their profit estimates on the company significantly since its earnings call in late July. The biggest cuts have come within the past month.
The average earnings estimate for the second half of 2015 has dropped to $1.45 a share, from $1.55 a month ago and $1.58 in June.
Look for those numbers to come down further now that Pacific Crest Securities and Cantor Fitzgerald both hacked down their price targets on the stock — although they maintained their buy ratings.
Cantor’s Youssef Squali dropped his target to $88 a share from $95, while Cheng Cheng at Pacific Crest slashed it to $80 from $94.
As reported here in the past, Wall Street analysts rarely change their buy recommendations on stocks issued by large, newly-public tech companies.
The banks they work for make big money underwriting blockbuster tech IPOs and follow-on offerings. Analysts don’t want to get on the wrong side of company executives.
But profit estimates are adjusted more frequently than stock recommendations, and the continued decline of Alibaba’s consensus number suggests any turnaround in the stock may be a far way off.
If Alibaba executives Ma and Tsai follow through on their plans to secure loans against their stakes — rather than begin selling after their IPO lock-ups expire in mid-September — that may help build confidence on Wall Street.
Insiders typically do a good job of timing their share sales because they have insight into the business that retail investors don’t.
Yahoo and Softbank, Alibaba’s largest shareholders, have also pledged not to sell shares.
Yet the IRS decision not to provide Yahoo with a so-called private letter clearing its plans for a tax-free spin-off could complicate those plans. Although the Feds may still ultimately approve the plan, as Yahoo noted in a securities filing.
Plus, the fact that Alibaba’s revenue rose slower than its gross merchandise value (GMV) during the quarter ended in June suggests the company is making less on every transaction amid increased competition. GMV, the total value of transactions sold through a particular online marketplace, is one indicator of how well an e-commerce site is performing.
Alibaba has said its third-quarter GMV is lagging its expectations, while analysts continue to cut their profit estimates and price targets.
It all adds up to a bearish near-term environment for Alibaba shares.
John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.