Alibaba Faces Regulatory Hurdles in China; Shares Slip 4%

Shares of Alibaba Group fell 3.9% on Feb. 2 after the e-commerce giant gave an update on its regulatory challenges at its fiscal 3Q earnings.

The company is facing an anti-monopoly investigation from the State Administration for Market Regulation in China. Alibaba (BABA) said that while it continues to co-operate with the Chinese authorities regarding this investigation, it has also established a special task force to conduct an internal review.

Alibaba also gave an update regarding the planned initial public offering (IPO) of its Ant Group, which was suspended in November. The company stated that Ant Group is in the process of developing a rectification plan that will be subject to regulatory scrutiny in China as there had been “significant changes in the Fintech regulatory environment”.

As a result, Ant Group’s IPO plans and business prospects remain considerably uncertain, the company said.

In the fiscal third quarter, Alibaba reported non-GAAP diluted EPS of $3.38, which were up by 21% year-on-year and came in ahead of consensus estimates of $3.26. Revenues jumped by 37% to $33.8 billion year-on-year, beating analysts’ expectations of $33.3 billion. (See Alibaba Group stock analysis on TipRanks)

Alibaba CFO Maggie Wu said, “We delivered another solid quarter…our strong free cash flow enabled us to further invest in strategic areas. We are pleased that our Alibaba Cloud business achieved positive adjusted EBITA during the quarter and Cainiao Network was operating cash flow positive. These progresses reflect our long-term approach to organically incubate and expand businesses from launch to profitability.”

Separately, the company also announced a plan to sell US dollar-denominated senior unsecured notes. The principal amount, maturity dates, interest rates and other terms of the notes have yet to be finalized, Alibaba said.

Following the earnings release, Mizuho Securities analyst James Lee raised the stock’s price target from $270 to $285 and reiterated a Buy rating. Lee wrote in a note to investors, “Dec20 quarterly results were modestly better than expectations due to strong demand from Double 11 promotions. At the same time, the Cloud computing business reached profitability for the first time on strong growth. “

“However, margins will likely be under pressure due to increased investments in community-buying model, local delivery for non-food categories, and retail stores in lower-tier markets. We are maintaining FY23 Core EBITA estimate at RMB 319bn as we already factored in increased expenses.” the analyst added.

The rest of the Street is firmly bullish about the stock with a Strong Buy consensus rating. That’s based on 22 analysts recommending a Buy and 1 analyst suggesting a Hold. The average analyst price target of $325.11 implies 27.7% upside potential to current levels.

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