Alibaba Group Holding Ltd (NYSE:BABA) is the latest company to make the market worry about growth this earnings season, and given the way traders punished BABA stock, it’s clear they’re in no mood for anything but pristine news from anybody.
Alibaba earnings missed top-line forecasts, but they weren’t that bad — and yet BABA stock cratered 10% in early trading. That’s a massive move for a company that had a market cap of $245 billion before the selling began. With these sorts of expectations, it’s no wonder the S&P 500 can’t get any traction.
Even more worrisome for those who didn’t get in on the IPO price of $68 a share, BABA stock is now very close to where it closed its first day of trading.
True, for those lucky few who were offered the IPO price, their BABA stock is still up 45%. But for civilians who had to wait for Alibaba stock to start trading, BABA is up just 5% since its first day as a public company. That’s not exactly the kind of life-changing investment BABA was supposed to be.
Furthermore, Alibaba stock’s momentum has truly sputtered out. It’s down 17% since hitting a closing high in November.
It’s also noteworthy that the market wouldn’t give Alibaba any slack about why it came up short of analysts’ revenue forecast. The company is focusing on expanding its mobile user base, but fees and ad space are lower for mobile than desktop. The strategy is sound, since mobile is where the growth is, but the market seemed to have no patience with the investment.
BABA Stock Can’t Catch a Break
Revenue of $4.2 billion missed analysts’ average forecast of $4.4 billion. Yes, it still grew 40%, but that was less than the 47% the Street was looking for, as well as a slowdown from the 54% growth seen in the previous quarter.
That’s a significant shortfall and slowdown, but it doesn’t tell the whole story of the quarter, which was in many ways was very strong.
Mobile continued to charge ahead. Mobile transactions accounted for 42% of all transactions in the most recent quarter, up from 36% last quarter and 20% a year ago. The number of active mobile users grew to 265 million from 217 million a quarter ago, and 136 million a year ago.
Torrential growth in mobile helped the sum of all of Alibaba’s transactions — known as gross merchandise value — to increase 49% to $127 billion. Alibaba recorded record sales of $9 billion on Singles Day alone, which is China’s busiest shopping day of the year.
However, it’s not just the revenue miss that sparked the selloff in BABA stock. The market is more understandably worried about two other developments: slowing growth in China’s economy and a serious threat from Chinese regulators.
Revenue growth from Alibaba’s China retail marketplaces was actually a drag on total revenue growth. That’s not good, but is it really discounted appropriately by the destruction of $25 billion in market capitalization?
An assault from a powerful Chinese regulator accusing Alibaba of failing to crack down on the alleged sale of fake goods and other illegal activity on its platforms shows the potential capriciousness of the government.
And if the saber-rattling by Beijing wasn’t enough to rattle investors, Yahoo! Inc.’s (NASDAQ:YHOO) plan this week to spin off its $40 billion position in BABA stock into a sort of shadow vehicle for investing in the company further complicates matters.
Whether the latest selloff is a short-term knee-jerk reaction or the beginning of an extended downtrend in Alibaba stock remains to be seen. But given the market’s gyrations this year and the amazing plunge in BABA stock, as good as some of the internals were, it sure doesn’t feel like a buy on the dip.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
