SunTrust's Peck Notes Alibaba (BABA) Faces Near-Term Headwinds But Remains a Long-Term Bull

SunTrust Robinson Humphrey analyst Robert Peck weighed in on Alibaba (NYSE: BABA) ahead of several near-term headwinds, including the IPO lockup expiration. The firm remains bullish long-term.

Peck commented, "Alibaba has several headwinds that are weighing on shares in the near term including; 1) lockup expiration on March 18th; 2) SEO and SEM changes as well as continued mobile shift on the platform lower monetization; 3) enhanced efforts to combat counterfeit goods and raise customer service increase costs and slow expansion 4) losing high-margin lottery sales. We feel that decisions regarding bid keywords (SEM) and the sort algorithm (SEO) are smart and will drive future results, reminiscent of Google. Further, the efforts to enhance quality on the site will aid in long-term wallet share gains and are similar to battles eBay and Google have waged in the past. While we are reducing our estimates for the above reasons, we remain bullish on the long-term outlook and feel the current valuation is attractive."

On the lock-up, the analyst notes the Alibaba has 2 remaining lock-up dates: 1) today, March 18th and September 18th. The March 18th lock-up is ~437M shares (~17% of outstanding). However, the breakdown of these shares will likely reduce the net impact to the market. Employees hold ~100M of the shares and will be subject to restriction until after FQ4 results in May. The ~315M held by institutional shareholders is therefore the focus. This represents ~13% of shares outstanding and would effectively >2x the public float. However, we believe any selling will be done ratably if at all considering: 1) the recent price decline vs. long-term outlook; and 2) the investors involved.

The firm is reducing estimates on the SEO and SEM changes, although they see them as long term opportunities: F4Q'15 Revs/EBITDA/EPS estimates go to $2.7B/$1.2B/$0.32 with a 2.00% take rate from $2.9B/$1.4B/$0.46 and 2.14%. FY16 and FY17 estimates go to $15.4B/$8.1B/$2.54 and $19.9B/$10.3B/$3.25 respectively from $16.1B/$8.7B/$2.81 and $20.9B/$11.4B/$3.64

The firm maintained a Buy rating and price target of $110.00. They view valuation as compelling at 20x EV/EBITDA and 28x PE.

For an analyst ratings summary and ratings history on Alibaba click here. For more ratings news on Alibaba click here.

Shares of Alibaba closed at $84.50 yesterday.

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