SEC probe weighs on Alibaba stock, after strong earnings result

Alibaba following the Amazon model: Expert
Alibaba following the Amazon model: Expert

In an environment where regulators have slapped major banks with multi-million dollar fines for breaking rules, the SEC's on-going investigation into Alibaba's accounting practices is clouding investor sentiment, one portfolio manager told CNBC.

Christian Magoon, CEO at Amplify Investments, told CNBC's "The Rundown" that investors were hesitant to initiate a new position on Alibaba's stock because they were not sure if the U.S. Securities and Exchange Commission (SEC) would hand the Chinese e-commerce giant any fines or penalties.

Alibaba said in May that the SEC was looking into its accounting practices related to transactions between its Cainiao logistics arm and other affiliates, as well as the way it reported figures from its annual "Singles' Day" shopping event.

On Wednesday, Alibaba's stock closed down 2.61 percent on the NYSE, after the company posted strong earnings and revenue that topped analysts' expectations.

"Once the stock gets past this, be it a good or bad outcome, I think we will see a relief for Alibaba," Magoon said said of the investigation.

On Tuesday, The New York Post reported that a whistle-blower at the Chinese e-commerce giant was helping the SEC with the investigation — a claim that Alibaba rejected.

In the three months to September 30, Alibaba's revenue jumped 55 percent on-year to 34.29 billion yuan ($5.14 billion). While the Chinese tech giant's core online retail business posted a near 50 percent growth in operating income, its cloud computing, digital media and entertainment and innovation businesses continued to make losses.

Anthony Kwan | Bloomberg | Getty Images

Magoon said he was not excessively concerned about the lack of profitability in those businesses since they were still growing. For example, the number of paying customers using Alibaba's cloud services grew 108 percent on-year to 651,000 users.

"They are trying to follow the Jeff Bezos model," he said, referring to how rival Amazon made a series of investments in various non-core businesses, grew them and eventually turned them into money-makers for the company, such as its cloud business Amazon Web Services.

"I'm willing to give them the benefit of the doubt that they will be able to turn these businesses into profit centers in the years to come," Magoon said.

A 'Single' bright spot

Magoon and other analysts expect a much stronger performance from Alibaba in the December-quarter, as the company gears up for the 24-hour "Singles' Day" shopping event on November 11, which is said to be much bigger than both the Black Friday and Cyber Monday shopping events in the United States.

A good Singles Day could, theoretically, counter some of the investor pessimism surrounding the ongoing SEC investigations, an analyst said.

"(Single's Day) is going to be a blockbuster sort of event," Chi Tsang, head of China Internet research at HSBC, told CNBC's "Squawk Box" on Thursday. "It's going to have a very big catalyst for next week (and) it's going to definitely drive the fourth quarter revenue momentum."

There were 115 million buyers on Alibaba's marketplaces, placing about 467 million delivery orders and generating 91.2 billion yuan ($14.3 billion) in gross merchandise value, during the 2015 event.

Alibaba had been generating momentum in the lead up to this year's event through "virtual reality, augmented reality and online-to-offline (channels)," Tsang said.

"They have a thousand international brands (participating) and it's going to be live-streamed on Youku as well as a number of their mobile apps," he added, referring to the popular Chinese video streaming site that's part of Alibaba's ecosystem.

The Chinese tech giant dived into virtual and augmented reality this year with the introduction of the Buy+ VR technology designed to help shops bridge the divide between the online and offline worlds. Its finance arm, Ant Financial, also demonstrated a VR payment system that could potentially allow users to shop inside virtual stores without having to take their VR headsets off to settle payments.

Magoon said the potential for Alibaba was only growing larger given its vast number of active users, adding that this year's one-day shopping event could be equivalent to "seven Black Fridays in one 'Single's Day'."

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