Alibaba will be OK despite earnings miss: experts

Alibaba surprise revenue miss sent shares plunging on Thursday, but some investors say their enthusiasm for the Chinese e-commerce giant has not cooled, given its long-term potential.

"I don't think it's even a stumbling block," said Mark Yusko, head of the $4 billion Morgan Creek Capital Management.

Alibaba Group Holding Ltd shares fell 8.8 percent on Thursday to close at $89.81, sending the stock below its Sept. 19 first-day opening price of $92.70, after the company reported lower-than-expected revenue.

The company's record $25 billion initial public offering was met with great fanfare, attracting big purchases from hedge funds managers eager for exposure to a company frequently referred to as the "Amazon of China." Shares soared, hitting a high of $120 in November, but the stock has slumped since, losing 25 percent of its value.

Despite the revenue miss and a migration of customers to mobile devices, where margins are typically narrower, investors said the stock remains attractive as a long-term play on China's burgeoning consumer market.

"We're in this for the long term. We think this is going to be a dominant franchise," said Yusko.

Yusko started buying shares of Alibaba through private purchases well before the company's offering last September, and has added to that position over time.

Hedge funds owned about 4 percent of Alibaba's equity - or nearly 100 million shares - as of Sept 30, with 27 different funds counting it among their top 10 holdings, according to Goldman Sachs data analyzing hedge fund filings.

But the stock's strong debut last year - as well as gains in the four months since - may have set expectations too high, said Vince Rivers, senior portfolio manager at JO Hambro Capital Management for the small/mid-cap US equity strategy.

"It's not cheap," he said. "At a relatively high valuation, you're going to get this kind of reaction."

Alibaba's forward price-to-earnings ratio fell to 29.7 on Thursday from 32.6 with the stock's decline, though that valuation makes it still more expensive than auctions site eBay Inc or Chinese rival Baidu Inc.

Yusko and Rivers both compared the company to Facebook, another Internet giant that similarly struggled to turn its large customer base into financial gains, particularly as many people migrated from desktops and laptops to their mobile phones.

Facebook shares struggled for more than a year after their 2012 IPO. It now trades at more than double its IPO price of $38 a share.

Headed into earnings, options trading in Alibaba was largely dominated by bullish call bets, but bearish put activity was stronger on Thursday. Bets on the shares dropping to $85 by March 20 were among the busiest of the company's options on Thursday, according to Thomson Reuters data.

Alibaba's mobile monthly active users nearly doubled from the same quarter the previous year to 265 million. Sales through mobile devices, which typically have lower margins, accounted for a bigger slice of total sales than in the previous quarter.

"We have to work through that growing pains period of that transition" to mobile, Rivers said.

While China's growth is slowing, the world's second-biggest economy is still expanding at rates far faster than the developed world. The country's economy grew 7.4 percent last year, slightly below the government's 7.5 percent target.

That's more than triple the 2.4 percent pace the International Monetary Fund estimates the United States registered in 2014.

"Chinese Internet consumption is still a great story; the company is still gaining new buyers and is growing really fast in lower-tier cities. There are many things that are going right," said Di Zhou, associate portfolio manager for the Thornburg International Value Fund, which owned 4.7 million shares of the stock at the end of September.

Zhou declined to comment on whether the fund is currently active in the shares, but said she still likes the company.

"From our perspective, it's more of an issue of short-term pain than something fundamentally wrong that won't come back," she said.