Alibaba (NYSE:BABA)’s Love Affair with Analysts Didn’t Last Long

Alibaba Group Holding Ltd came to the market more than a year ago. At $25 billion, it set the record for the largest IPO in history. The very first public trade was at $92.70, well above its $68 offer price.

Alibaba group holding ltd

In the following three months, the stock soared another 27 percent. Finally, on November 10, it hit its peak of $119.15. Since then, the story has been all down hill. So what went wrong with Alibaba that its stock is off 50 percent from peak? Some micro turbulence. Some macro uncertainties.  And the all familiar story of analysts creating unrealistic expectations, and then at the first sign of trouble, dumping the stock.

Alibaba Could Do No Wrong

Remember the time when Alibaba Group Holding Ltd was on a sky-high trajectory? IPO had just happened. Everyone was excited. And MKM Partners decided Alibaba was a “powerhouse” and “a core holding” among growth managers!

Then came the first full quarterly results as a public firm. Revenue growth was solid. The cheer on Wall Street grew even louder. Cantor Fitzgerald remarked Alibaba’s “outsized growth” and stable margins calls for a much higher valuation multiple. Alibaba played to the gallery and made up “Single’s Day,” a holiday in China similar to the “Cyber Monday” in the U.S. The expectations were sky-high.

“We see the relatively new phenomenon (only in its 6th year) generating a boost, especially as Alibaba extends the promotions globally,” Gil Luria, analyst at Wedbush Securities, said ahead of the holiday.

But then things started to grow sour. It had to. Nothing lasts forever. Especially the unrealistic expectations of analysts.

And what was the catalyst? I can’t remember any. “Singles Day” sales were a big success. Yet the stock plunged 4 percent that day – the worst price drop since its market debut.

Since then, the Chinese e-commerce firm has been hit by bad economic news and a regulatory clamp down in China. The herd of analysts realized the stock can’t keep up with their expectations. So what do they do? Start slashing the price targets of course.

This year has been all bad news for the stock. This month alone, 25 brokerages have cut their price targets on Alibaba Group Holding Ltd ’s stock. Surprisingly, FactSet says that the average still stands at a respectable $90.35 a share.

Oppenheimer recently cut back its fiscal 2016 and 2017 EPS estimates. Citigroup has also expressed concerns about rising competition in cross-border e-commerce. Morgan Stanley, Deutsche Bank, Macquarie Research, everyone has something negative to say about the stock.  So how come the average price target still stands at almost 50 percent higher than the current market price?

Media Also Changed Its Tone

If analysts made up their mind, can media be far behind. Barron’s published an article on September 12 with the caption “Alibaba: Why it could fall 50% further.” Next came MarketWatch’s transparency reporter, Francine McKenna. She wrote an article questioning whether Alibaba Group Holding Ltd ’s numbers could be taken at face value at all.

“The Alibaba business model — an online market with mainland China headquarters, registrations in the Cayman Islands and an audit signed not by the U.S. firm nor even its mainland China office — should cause investors to pause,” McKenna wrote.

Sure, there can’t be any smoke without the fire. China is getting messier by the day. And since Alibaba Group Holding Ltd is primarily China-focussed, business was bound to suffer. There are no signs of any recovery yet. And things might get stretched. But trust me, at the very first flicker of a reversal, these very analysts will again be singing paeans. So moral of the story – analyst recommendations should always be taken with a pinch of salt!

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