Alibaba struggles to meet expectations

The company's shares continue drifting towards last year’s IPO price.           

Alibaba sign on door
Source: Bloomberg

On Thursday 7 May Alibaba will post its fourth-quarter figures, and the adjusted earnings per share are due to come in at $0.42 — well below the previous quarter’s $0.821. Sales are also called weaker at $2.723 billion down from $4.258 billion. These figures have both contributed to the company’s fourth-quarter pre-tax profits coming in at $718 million less than half the third-quarter’s pre-tax profits of $1.499 billion.

Institutional opinion for the Asian trading company is still very high with 38 buy recommendations, six holds and only two sell recommendations. The average twelve-month price target for the company is $107.25 and considering that the shares are currently trading around the $79.50 region this offers an eye-catching 35% premium.

In September of last year, the company raised $21.8 billion with an initial public offering of shares at $68 and this gave the company a market capitalisation of $167.6 billion. At the time of its float almost 90% of Americans had never heard of the company and considering it was being quoted on the New York Stock Exchange there was always likely to be a rebalancing of the blue sky value that the company had attracted. The market expectation for the Chinese economy has continued to cool and the complicated mix of businesses that Jack Ma has acquired have not all truly come together to offer the company the synergies that had been originally hoped for.

On top of these issues, the company has not managed to break into the more mature Western markets as 95% of the company’s revenue is derived from inside China and has subsequently suffered growing pains. Alibaba also has to sometimes deal with the consequences of Jack Ma’s comments; in November of last year he outlined the dangers his company faced in meeting the high expectations the markets had placed on it and subsequently saw the share price tumble as traders assumed the worst.

The longer-term outlook for the company has a multitude of opportunities and possibilities but at this early stage in its life the expectations being placed on the company are proving to be too burdensome to handle. The share price continues to migrate back towards the $68 IPO price and although the company is currently flirting with moving into oversold territory this latest set of figures are unlikely to offer too much support.

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