Alibaba Group Holding Ltd Could See Further Downside

Arete Research has cut its price target on the stock from $75 to $72

Alibaba shares have declined almost 16% from January 26 after the Chinese regulator SAIC accused the company of turning a blind eye to illegal activities on its e-commerce platforms. SAIC said that Alibaba failed to curb the sales of counterfeit goods. Alibaba employees took bribes from merchants in exchange for favors. Concerns about Alibaba’s practices have brought the stock down in the past few weeks.

Alibaba should trade at a discount to rivals

Arete Research analysts Muzhi Li and Richard Kramer see further downside in the stock. They said that Alibaba should trade at a discount to its competitors, given structural pressure on its margins. The research firm has cut its price target on the stock from $75 to $72, which reflects a 17% downside from the current levels. Most analysts are impressed by the Hangzhou-based company’s progress in the mobile space.

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For the December quarter, mobile accounted for 42% of the company’s total transactions, up from 36% in the preceding quarter. But mobile sells fewer ads, affecting the company’s revenue. Arete analysts said that mobile users produce fewer page views and clicks that lead to lower advertising revenues. Ads accounted for about 50% of Alibaba’s total revenue in Q3, down from 62% in the same quarter a year ago.

So, the e-commerce giant now shows more Tmall ads on its mobile app. That’s because B2C Tmall merchants are usually big brands that are more profitable to the company, says Shuli Ren of Barron’s. But the company has to keep its Taobao merchants happy. So, it would “tilt PC traffic to Taobao vendors and lower their cost of marketing campaigns.” Li and Kramer say it could affect Alibaba’s PC revenue.

Alibaba needs to tilt towards Tmall

To maintain its rapid growth, the Jack Ma-led company needs to tilt towards Tmall, which is more profitable. But December quarter results show that Tmall’s gross merchandise volume growth continues to slow, while Taobao GMV grew at the fastest pace in five quarters.

Separately, law firm Robbins Geller Rudman & Dowd LLP has filed a class action lawsuit against Alibaba for violating the U.S. Securities Exchange Act. The law firm accused the online retailer of using false information to mislead the public ahead of its IPO last year.

Alibaba shares rose 0.43% to $87.88 in pre-market trading Friday.