Alibaba (BABA) - Get Report shares dropped nearly 7% on Wednesday after disclosing that its accounting methods are under investigation, but most Wall Street analysts who cover the company don't seem too concerned.
In a regulatory filing with the Securities and Exchange Commission on Tuesday, the US-listed Chinese online retail giant announced that earlier this year, the SEC began investigating whether the company had violated any federal securities laws.
According to Alibaba's filing, the SEC probe is focusing on "our consolidation policies and practices (including our accounting for Cainiao Network as an equity method investee), our policies and practices applicable to related party transactions in general, and our reporting of operating data from Singles Day."
In the past, analysts have raised flags about what they see as Alibaba's opaque accounting, especially with regards to how it treats its affiliate companies. Alibaba owns 47% of Cainao, its logistics arm, which is reportedly valued at 50 billion yuan, or $7.7 billion. In Tuesday's regulatory filing, the company noted net losses for Cainiao of 90 million yuan ($13.7 million) in fiscal year 2015, and 295 million yuan ($44.9 million) in fiscal 2016.
Alibaba CFO Maggie Wu said in the company's most recent earnings report in May that it will be trying to give more details on its results and businesses starting in the current fiscal year, particularly Caianiao.
Singles Day is a huge Chinese shopping holiday similar to Black Friday that's held on Nov. 11. Last year, the company said it had racked up a mammoth $14.4 billion in gross merchandise volume on that one day.
Alibaba said it is cooperating with the current SEC probe. In early trading on Thursday, Alibaba's shares were up 2.6% to $77.53.
Here's a look at what the analysts had to say about the investigation.
Robert Lin, Morgan Stanley (Overweight, $119.30 PT)
"Since late 2015, a few investors have raised concerns and have been publicly vocal about the accounting treatment of Cainiao Logistics: We believe these investors have a misunderstanding about China's express industry and the role of Cainiao in the logistics value chain...We are incrementally more positive on Alibaba given its increased transparency and disclosures on Cainiao and other related parties."
Alan Hellawell and Ross Sandler, Deutsche Bank (Buy, $110 PT)
"These dialogues occur with some regularity between the SEC and other listed Chinese Internet companies. While we would never be dismissive of an SEC inquiry, we believe that investigations are sometimes launched because the SEC is unfamiliar with various constructs (e.g.,- Cainiao's unique business model, the unprecedented scale of Singles Day, etc.)...We note that Alibaba has improved disclosure around Cainiao...We think the co views itself as fully US GAAP-compliant on these fronts...It is possible SEC interest in BABA's approach to reporting operating data related to Singles Day (the world's biggest e-commerce event) relates simply to better understanding this unique phenomenon. There, however, could be many other reasons for the inquiry (e.g., questioning the claimed scale, etc.)."
Ken Sena, Evercore (Buy, $98 PT)
"An SEC investigation is certainly never a good thing...As this no doubt has set in motion many theories, to our knowledge, there has been no specification with regard to the exact nature of the SEC's potential concerns...If we look at Cainiao's newly disclosed financials, it would appear that even under a consolidated treatment, there is not much there to move the needle on a consolidated basis...It is difficult to shed light on exactly why the investigation is occurring, but it would seem reasonable that the sheer magnitude of events like Singles Day (which generated $14.3bn in 2015) or the strong influence that Singles Day and Cainiao Network exert over Alibaba's community of sellers and logistics providers, where there isn't a clear corollary in the west, may have proved sufficient for the SEC to at least inquire."
Jialong Shi, Nomura (Buy, $95 PT)
"As the 20-F provides very few details on the SEC's enquiries, it is difficult for us to make any predictions about the possible outcomes of this investigation. The only detail the 20-F revealed is that one of the enquiries is about its accounting for Cainiao Network as an equity investee. According to Alibaba's earnings release for 4QFY16, the company owned a 47% stake in Cainiao, whose net loss was ~Rmb200mn in 4QFY16, accounting for 2% of Ali's pretax profit. Since Alibaba's current profit has already factored in the contribution from Cainiao, a potential change from equity method to consolidation, if the SEC requires it, should have no impact on its earnings, in our view."
Jason Helfstein and Jed Kelly, Oppenheimer (Outperform, no PT)
"In most cases, public companies wait until their entire correspondence with the SEC is complete, before disclosing the questions/answers to the public. We view BABA's releasing the questions before a finished inquiry as more transparent and shareholder-friendly...We also confirmed with the company's Investor Relations unit that the Singles' Day issue relates to prior confusion over BABA's gross merchandise volume (GMV) definition, as the current metric does not remove 'fake' orders, which could inflate 'reported' GMV (a non-GAAP metric)...Given BABA's track record of improving financial clarity and cracking down on fake products, we think the company is trying to become more transparent. Meanwhile, with the stock trading at 24x/17x F17/F18 P/E multiples and growing at 30% CAGR, we believe investors have already been discounting the valuation on disclosure concerns."