Background
I have previously discussed how Alibaba (NYSE:BABA) has been trying to find a social networking platform that will help it to rival Tencent's (OTC:TCEHY) WeChat app. Having invested in instant messaging app Momo, I have expected it to continue to see strong user growth as it is used as a complement to WeChat rather than a direct competitor.
Momo released its fourth quarter earnings last night, reporting 702.3% annual net revenue growth, and its 69.3 million monthly active users represented annual growth of 105.6%. This is significant to Alibaba because of the mobile ecosystem strategy seen amongst China’s tech firms. Whilst Alibaba has its dominant shopping and payment platforms, it has been lacking a social networking entry point into its mobile ecosystem. This is important because users spend more time on social networking apps than any other, and firms are therefore able to increase their monetisation of each user. Should Momo continue to show strong growth, then I would expect Alibaba to further integrate Momo into its mobile ecosystem.
The most popular apps for men (L) and women (R) each hour in China.
*Momo is represented by the blue and white logo. Source: iResearch China
Over the past few weeks, we have seen continued downward pressure in Alibaba’s share price, and I expect that this is related to the expiration of the 180 day shareholder lockup, where 429m shares could potentially hit the market on March 19. This has been at the forefront of investors’ minds since the fiscal third quarter earnings release at the end of January, and given the share price performance since then, I expect that pessimism over the lockup expiration has already been priced into the valuation.
Therefore I expect that the lockup expiration on March 19 will be a non-event, and from there Alibaba should have few near term headwinds. However, until March 19, I don’t expect to see any sustained gains. It should also be considered that Alibaba closed at $85.49, after trading at an all time low of $80.03 earlier in the week. Given the relatively low price, it would suggest that there is currently little reason for insiders to sell.
The Twitter-like service Weibo is set to release its fourth quarter earnings on March 10, and given Alibaba’s investment in the firm, it will be closely watched. Weibo has been used heavily by brands throughout the fourth quarter because it is an effective way in which to promote deals during the Single’s Day and 12.12 shopping festivals, and we should therefore see a notable growth in users, and paying account revenues.
Management and risk description
Basing a trade view on the earnings releases of other companies understandably has some risk. Momo’s earnings conference call has just ended, and the share price is up marginally in after hours trading. However, this isn’t a reliable indicator because Momo is a relatively illiquid stock, and a better indication of shareholder reaction will be seen during pre-market trading.
As discussed above, Alibaba’s shareholder lockup expiration has the potential of creating near term volatility, and whilst I believe that the risk is already priced in and the lockup expiration will be a non-event, it’s difficult to predict how insider shareholders will react.
Parameters
Entry: $85.49
Stop: $80
Target: $92
Duration: Three months