Alibaba founder Jack Ma sends up a cautionary flag
Corrections and clarifications: A previous version of this story had an incorrect title for Jack Ma. He is Alibaba's founder and executive chairman.
"In action, watch the timing." — the Tao Te Ching
SAN FRANCISCO — It's usually wise to take note of what a public company and its executives say and do just before they release quarterly financial results.
While securities rules limit how much they can share, clues are there for investors who are paying attention.
Last week, for example, reports surfaced that Twitter had ended regular stock sales by executives, a move interpreted as a confidence-building gesture aimed at Wall Street.
Given that Twitter CEO Dick Costolo had sold $35.2 million in Twitter shares since last July, that interpretation made sense.
And yet the timing seemed odd, given that Twitter shares (TWTR) had surged by more than 30% since the start of the year.
Why would the management of a company whose stock had so much bullish momentum need to build investor goodwill?
The answer to that question came only after Twitter released a financial report and forecast so disappointing that its shares got pummeled by more than 20% in two days.
In the wake of that disaster for Twitter shareholders, the cessation of executive stock sales makes more sense.
This week's yellow flag for investors was sent up by Alibaba (BABA) Executive Chairman Jack Ma.
On Wednesday, it was widely reported Ma had instituted a hiring freeze at the Chinese e-commerce giant.
The news came from the transcript of a meeting at which Ma reportedly warned that the company had grown too quickly.
Alibaba's latest publicly available numbers suggest that's true, at least from a bottom-line perspective.
The company had 34,081 employees as of Dec. 31, or 63% more than the 20,884 it had a year earlier, according to its regulatory filing for the period.
The surging head count helped push Alibaba's fiscal third-quarter costs up 69%, much faster than revenue growth of 40%.
As a result, the company's operating income as a percentage of revenue (better known as operating margin) shrank to 36% from 47%.
Its net income also fell in a big way, dropping 28% from a year earlier, to $5.9 billion.
Early next week, Alibaba is expected to report results for its fiscal fourth quarter.
Wall Street analysts are expecting sales to rise 44%, to $2.78 billion, while profit excluding stock compensation costs and other items is seen at 43 cents a share.
Alibaba shares have fallen 16% since Jan. 28, the day before the company released its numbers for the quarter ended in December.
That's a poor showing given that the Nasdaq is up 8.5% during the same time.
Those investors who sold Alibaba stock based on the reports, pushing its shares down 3% on Wednesday, are clearly taking a cautious approach.
That seems prudent, because if anyone would know whether Alibaba's costs grew too fast for the quarter ended in March, it would be its founder.
A hiring freeze would be a very unusual move for a fast-growing company like Alibaba — unless its top management was worried about the health of its bottom line.
The investing public won't see Alibaba's income statement until next Tuesday, of course.
With the stock falling a bit more on Thursday, and now trading within 2% of its record intraday low of $80.03, some Alibaba bulls might even use any such freeze as another reason to buy.
But for more circumspect Alibaba investors, it's probably worth asking the following question between now and the close of market on Monday.
Why did Ma, less than a week before earnings, feel the need to communicate that the company has firm plans to rein in costs for the upcoming fiscal year?
John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.