Alibaba Group (BABA – Analyst Report) operates online and mobile marketplaces in retail and wholesale trade, as well as cloud computing and technology services to enable consumers, merchants, and other participants to conduct commerce in its ecosystem.
Alibaba could be considered the “Amazon (AMZN – Analyst Report) of China” with one big exception: they make money. We’ll find out on Thursday July 23 if Amazon is headed toward profits with their massive revenues after a record-setting Prime sales day.
But even with profits, BABA shares have dropped over 30% since their peak at $120 in November shortly following the IPO. A couple of explanations come to mind.
First, the scramble by institutions and the public to get a piece of this behemoth of Chinese web commerce, and its roughly $3 billion in quarterly revenues, probably pushed shares to an extreme and questionable valuation.
You may recall that November surge in BABA shares was driven by the huge success and enthusiasm surrounding Alibaba’s ‘Singles Day’ which had sales topping $9 billion. Their alternative to Valentines Day even topped US Black Friday online sales.
At that peak, the market cap of BABA was nearly $300 billion and the forward P/E was 40X. Now the market cap is much closer to $200 billion. But the P/E is still over 40X, because the while the “P” came down, so did the estimated “E.”
That brings us to the second primary reason that BABA shares have sold off: the earnings estimates dropped. Here’s a look at the Zacks Detailed EPS tables…
/ What should stand out here is that full-year EPS estimates for this year and next dropped 13% and 12% respectively in the last 90 days. These cuts occurred after the late January earnings report that disappointed investors.
If we assume that BABA shares were still overpriced at $100 in Q1, we can see why they dropped more than the earnings estimates did.
BABA’s revenue streams are definitely attractive. And investors are probably looking forward to the company “reinventing” another holiday, especially if it comes with huge 10-figure sales again.
But until the EPS estimates stop going down and start going back up, it may be time to be cautious. The Zacks Rank will let you know.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.