Ease Up On Alibaba, Fraud Problems Not Just In China

Alibaba has been dealing with worries about allegations regarding fake items being sold on its Taobao online marketplace for some time, but one analyst says investors shouldn’t be worrying so much. He said this issue is more than just a problem for China. He says it’s everywhere and that Alibaba shouldn’t be blasted for it.

Allegations against Alibaba no big deal

The Chinese government recently called out Alibaba on fraud allegations, saying isn’t doing enough to control sales of fake goods on it online properties. MKM Partners analyst Rob Sanderson said in a research note today, however, that fraud is prevalent anywhere people are moving large amounts of money around.

He noted that Alibaba isn’t the only big company facing this problem because sales of fake goods and “unscrupulous practices” can be found at pretty much every big marketplace. Further, he said that China isn’t the only country dealing with this issue because the U.S. “is bursting with fraud” as well.

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Alibaba offers a “compelling” valuation

The MKM analyst remains bullish on Alibaba, calling the company one of their “most compelling large cap growth stories,” not only within Asia and China but also throughout the world and in every sector. He maintained his Buy rating and $125 per share price target.

The Chinese online retailer is trading at 22 times Sanderson’s 2016 non-GAAP earnings per share estimates. He’s projecting growth of between 30% and 40% in Alibaba’s earnings per share over the next three years.

Dealing with uncertainty

Aside from the fraud accusations lodged by the Chinese government, Sanderson also said that investors remain concerned about monetization. In the last quarter, the desktop take-rate missed expectations because of recent changes in algorithms and ad targeting.

The purpose of the changes was to increase the return on investment for merchants, which is important for long term growth because better performance means more merchants will be interested in selling on Alibaba’s platform. He noted that management isn’t expecting there to be a “sharp rebound” any time soon, which is why investors are concerned.

Another lockup expiration coming

Another concern has been the expiration on lock-ups of insider-owned shares of Alibaba. Sanderson notes that the recent expiration on March 18 “has been pretty quiet.” There were three days on which Alibaba saw an elevated trading volume with a total of 40 million shares above the average daily volume. Since then though, he notes that volume has been “well below average.”

The analyst points out also that many Alibaba insiders still have a lock-up on some of their shares which will last until after the company releases its March quarter earnings report, which is expected to be in May. After the next lock-up expires, another 100 million shares of Alibaba will become available for trading.

Shares of Alibaba closed down 0.1% at $82.28 per share on Thursday.