Alibaba loses its magic ahead of lockup expiry

Krisztian Bocsi | Bloomberg | Getty Images

Major banks are slashing their expectations for the world's biggest e-commerce company ahead of Wednesday's lockup expiration, citing near-term challenges to Alibaba's growth outlook.

Barclays was the third major bank in the past week to cut its price target and earnings estimates for the e-commerce giant. In a note on Tuesday, analysts lowered their 12-month price target to $100 from $107, and slashed full-year (FY) 2015 and 2016 revenue estimates by 0.6 and 2.6 percent, respectively.

"We will watch closely for any signs of potential further slowdown in revenues and earnings growth that might result from the rising competitive threat on market share stability," Barclays said.

Last week, Deutsche Bank and Credit Suisse announced similar decisions. The former cut its price target to $98 from $105.10 on Thursday, while the Swiss bank lowered its price target to $112 from $113 and projected 2 and 7.1 percent declines in 2015 and 2016 earnings, respectively.

To be sure, all three banks still have "buy" calls on Alibaba but cite issues like counterfeit merchants, management changes at Tmall and China's suspension of online lottery sales as reasons for their lowered price targets and earnings estimates.

Bad news for the stock

The lowered price targets come amid a wave of bearish sentiment on the Hangzhou-based company. Year-to-date, Alibaba's stock is down nearly 20 percent with prices currently at $84 from an all-time high of $120 in November.

Even further selling pressure is expected after Wednesday, which marks the end of Alibaba's lockup period. A lockup is essentially a restriction that prevents insiders from selling stock for 180 days after the initial public offering. Roughly 437 million shares - around 18 percent of shares outstanding - will become eligible for sale.

"In the near term, we believe that Alibaba is likely to see not only technical selling pressure but transition risks to fundamentals until it can demonstrate an operational turn around and growth rates closer to peers," warned Bradley A. Gastwirth, CEO at ABR Investment Strategy, in a note.

Barclays agreed, expecting an overhang on the share price to remain in place until the company reports its March quarter results.

What's the problem?

Three key factors are expected to hurt earnings potential in the short-term, Barclays, Deutsche Bank and Credit Suisse warned.

CEO Jack Ma has come under fire in recent months for permitting fake goods to be sold on Alibaba websites as well as failing to crack down on vendors for falsifying sales volumes.

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Meanwhile, Tmall - one of Alibaba's key online marketplaces -reshuffled senior management this month due to allegations of data fraud and inflated sales figures. And China's suspension of online lottery sales this month is expected to hurt the gross merchandise value of Taobao, another website belonging to Alibaba and China's largest online lottery sales platform.

"We see little in terms of positive near-term catalysts. Core operations could remain under pressure longer than expected, investments may not see near term contribution and competition is increasing," said Gastwirth.

Alibaba will also see lower revenue following last month's sale of its small and medium-sized enterprise (SME) loan business to affiliate Ant Financial, Barclays said. "In 3Q FY15 (December quarter), Alibaba recorded a total of 1.919 billion renminbi in the 'others' revenue line; we estimate slightly over 50 percent of this revenue came from interest income generated from small loans."