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Alibaba Group Holding Ltd Price Target Cut Before Earnings

Alibaba is scheduled to release its earnings report on or around April 28, but it may miss consensus estimates. Analysts are particularly concerned about Tmall because the Chinese online retailer has become stricter on its merchants in the fight against allegations of sales of fake merchandise.

Alibaba Group Holding Ltd Price Target Cut Before Earnings

Alibaba focuses on mobile

In a report dated April 22, Jefferies analyst Cynthia Meng and her team said their checks of the industry indicate that Alibaba is refocusing its resources on Taobao’s mobile platform rather than on Tmall. The company now faces more competition from Weidian.

The Jefferies team analyzed the top 200 mobile apps according to Analysys International and found that Taobao’s mobile app was ranked sixth in monthly active users for three consecutive months. Last year, the app was in third place, so they believe Weidian is putting up some tough competition for the Alibaba-owned app.

In spite of Taobao’s decline in ranking, the Jefferies team notes that it still enjoys double-digit penetration in all Chinese provinces. Other mobile shopping apps, on the other hand, have penetration rates in the low single digits, according to Analysys.

Tmall growth impacted by changes

The Jefferies team further said Tmall will probably see slowing growth in gross merchandise volume. The Alibaba-owned online property invited certain brands, most of which are high-end international brands, to join the platform. The company is aiming for 100% gross merchandise volume growth for all its merchants by focusing on popular and high-end offline brands, thus providing traffic and resource support for merchants.

Although Tmall’s higher barrier for entry should drive long-term value, the Jefferies team expects it to negatively impact the online property’s overall gross merchandise volume growth in the near term.

What to expect in Alibaba’s earnings report

Before next week’s earnings report, Meng and her team slashed their target price for Alibaba but maintained their Buy rating. Their price target moves from $118 to $98 per share.

They expect Alibaba to post revenue of RMB16.1 billion for the fourth fiscal quarter of 2015. That would represent a 34% year over year growth rate but is 5.3% lower than consensus estimates. They based their revenue estimate on total gross merchandise volume of RMB576 billion, also a 34% increase compared to last year. They’re expecting an overall monetization rate of 2.24%.

The Jefferies team estimates a non-GAAP operating margin of 46%, a decline of 8 percentage points year over year, and non-GAAP net profits of RMB7 billion, which would be a 5.3% increase and is 1.9% lower than the consensus estimate.

As of this writing, shares of Alibaba were down 0.02% to $82.03 per share.