Alibaba Valuation Cut, So Yahoo’s Price Target Cut Too

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As Wall Street prepares for Alibaba Group’s initial public offering, analysts are keeping an eye on the company’s financial status. Alibaba filed a revised F-1 filing with the Securities and Exchange Commission this week, and it showed a deceleration in revenue. The only question now will be whether this will dampen Wall Street’s excitement over the Chinese company’s IPO.

Alibaba Group’s monetization rate falls

In a report dated June 18, 2014, Bernstein analysts Carlos Kirjner and Peter Paskhaver note that Alibaba’s revenue deceleration was mostly because of a decline in overall monetization rate. They say the company’s mobile gross merchandise volume remains under-monetize and that it grew very rapidly. The Bernstein team believes that mobile advertising monetization has lagged because of limited ad demand from sellers on Taobao. They note that Taobao auctions off mobile keywords separately from the rest of Alibaba, and they believe this will correct itself gradually as mobile gross merchandise volume increases.

The analysts say Alibaba’s China Retail gross merchandise for mobile doesn’t monetize as well as it does for web.

Tmall’s effect on Alibaba’s overall results

However, they say Tmall’s gross merchandise volume partially offset this headwind because it uses an independent take-rate on gross merchandise volume for mobile and web. As a result, Tmall’s aggregate monetization rate is increasing faster than that of Taobao. They also note that Tmall is subject to seasonality, which helped drive Alibaba’s fourth calendar quarter revenue acceleration and also the deceleration in the first calendar quarter of this year.

The Bernstein team notes that Alibaba recorded a 2.2% aggregate monetization rate for gross merchandise volume for its China retail business, with is the lowest in the last eight quarters. They say this was due to “the receding of the pro-Tmall mix shift, the fast growth of mobile, and the seasonal decline in advertising intensity.”

Alibaba’s monetization falls

They estimate that mobile revenues from Alibaba’s China Retail segment are “quite small,” which they say suggests that monetization of mobile volume is lagging. In fact, they note that the online retailer disclosed commission revenues, which they think came almost entirely from Tmall. They also say that Tmall’s overall monetization rate is higher because Tmall sellers are spending more on advertising.

Based on their estimates of the Tmall and Taobao mobile monetization rates for the last several quarters, they believe mobile monetization of Taobao could be almost nothing, compared to between 2% and 2.5% for Tmall.

Solutions to Alibaba’s problems

The Bernstein analysts believe that advertisers on Taobao, whether they sell either there or on Tmall, must bid separately for mobile ad auctions. In addition, they don’t think that sellers have shifted their ad campaign budgets to mobile nearly as quickly as consumers have shifted their purchases over to mobile. Because of these factors, they think mobile auctions are “under-competed” and have depressed costs per click. They also think Taobao’s ad matching ability is compromised and having a negative impact on overall monetization and click-through rates.

The analysts offered some lessons learned from Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG). The search giant found that as buyers started to shift from desktop to mobile, it became important to manage mobile ad campaigns separate from web campaigns. Like what happened with Google, they believe sellers will gradually start bidding more for mobile keywords as buyers shift more and more to mobile.

Bernstein cuts price target for Yahoo

The analysts adjusted their model for Alibaba, lowering their valuation a bit to $210 billion. As a result, they reduced their price target for Yahoo! Inc. (NASDAQ:YHOO) to $43 per share, although they continue to rate the search giant as Outperform. Yahoo still holds a massive stake of more than 20% in Alibaba, and much of the company’s stock price has been riding on Alibaba’s financial results.

These estimates assume Alibaba Group’s IPO is priced at around $145 billion, which would be a 30% discount to what they think the Chinese Internet retailer’s fair value should be.

Next steps for Yahoo

Alibaba management is conducting their road trip across the U.S. this week, which means that the IPO date could be approaching. Bernstein analysts believe it could happen toward the end of July. They said Yahoo! Inc. (NASDAQ:YHOO) must tell its shareholders how it will use what it earns from Alibaba’s IPO because the value of the company’s stake “Will certainly see some ‘lack-of-liquidity’ discount.”

They say if shareholders remain uncertain about what Yahoo! Inc. (NASDAQ:YHOO) intends to do with the money, the part of the stake it doesn’t sell “will be subject to a further ‘risk-of-value-destroying-M&A’ discount.”

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