Pacific Crest Just Slashed Its Alibaba Price Target By 15%

In a report published Tuesday, Pacific Crest analyst Cheng Cheng detailed a recent visit to China in a "fact finding" mission surrounding Internet related business activity after the Chinese New Year.

According to Cheng, the tone was "positive" around demand for the Internet sector, as evidenced by a rebound in activity after the Chinese New Year. The analyst added that this should provide some comfort for investors concerned about a late Chinese New Year and sub-season guidance from several Internet names for the first quarter.

Long-Term Positive On Alibaba

Cheng stated that he is maintaining a long-term positive outlook on Alibaba Group Holding Ltd BABA but the company faces several near-term issues.

First, the impact to the suspension of online lottery sales in China could affect Alibaba's sales. As a result, the analyst suggested that Taobao's Gross Merchandise Volume (GMV) will see a 3 percent decrease. However, Alibaba could receive the necessary regulatory approvals to sell online products in the future, which could provide upside to lowered estimates.

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Second, Cheng stated that he has previously overestimated Alibaba's variable costs in his financial models, particularly around a seasonally weak fourth quarter 2015. After speaking with the company, the analyst is now increasing his cost of goods sold and operating expenses in the fourth quarter to reflect more fixed costs.

Finally, Alibaba has enacted, and will continue to enact, policies to improve the quality of merchants and goods old on its Taobao and Tmall platforms. These initiatives will continue to have an unknown impact on GMV and revenue, forcing analysts to adjust their GMV models downwards to be conservative in their estimates.

Estimate Changes

Shares of Alibaba remain Overweight rated with a price target lowered to $101 from a previous $106.

"Despite the negative estimate revision and lower price target on Alibaba, we continue to be positive on the company's outlook longer term," Cheng wrote. "We continue to see Alibaba as the dominant player in a rapidly growing e-commerce market, and see improving take-rate trends for Alibaba as the platform provides more value to both consumers and merchants."