Alibaba (BABA): Two Top Analysts Join the Earnings Discussion

Both Baird's Colin Sebastian as well as SunTrust's Youssef Squali continue to back Alibaba's long-term opportunity following the financial showcase.


Alibaba (NYSE:BABA) investors liked what they saw in this morning’s fourth fiscal quarter earnings show, sending shares on a roughly 4% rise today. In reaction, two of Wall Street’s best performing analysts weigh in batting for the bulls on this Chinese e-commerce king’s market opportunity- a king that hit a home run on another robust quarter.

Top analyst Colin Sebastian at Baird chimes in with a “positive” take, singing the praises of a soaring revenue growth outclass that rocketed 61% year-over-year for BABA. BABA benefited from sustained strength in core commerce that jumped 62% year-over-year along with a “healthy” ante of new China customers to the company’s table and further diversification between New Retail, Cloud Computing, and International Retail.

As such, the analyst reiterates an Outperform rating on BABA stock with a $220 price target, which implies a 16% upside from current levels.

Mobile engagement trends also shone for Alibaba in the quarter, with mobile monthly active users reaching a 37% quarter-over-quarter rise to 617 million. This marks “one of the highest net add quarters,” underscores Sebastian, who also takes note of stability in Cloud services growth, which vaulted 103% year-over-year. On back of strength in Lazada and AliExpress strength, the company’s international retail segment shot up 63% year-over-year. The company’s revenues for the fourth fiscal quarter climbed 61% year-over-year to ¥61.9 billion, outclassing the Street’s ¥58.8 billion forecast. Meanwhile, Digital Media and Entertainment growth experienced a 34% year-over-year surge to ¥5.3 billion, beating out the Street’s ¥4.94 billion. Free cash flow reached ¥8.6 billion for the quarter, a 13.8% slice of revenues, with non-GAAP EPS of ¥5.73 outperforming the Street’s ¥5.42 projection, or $0.91 in U.S. dollars against expectations of $0.86. “We note that Alibaba continues to ramp investments (including $15B USD R&D lab),” adds the analyst.

Sebastian continues, “Cloud computing momentum continues as usage ramps. Aliyun (cloud services) generated strong growth in F4Q18 (+103% vs. +104% in F3Q18), driven by growth in new customers, increases in usage, as well as a diversification in services. Segment EBITA declined slightly to -8% from -5% in F3Q as BABA continues to prioritize market share gains.”

Moreover, the analyst is encouraged to see mobile trends that led MAU Mobile to hit ¥230, a marked 28.5% year-over-year surge, with MAU growth riding on back of the company’s prioritization of its “mobile-first” strategy. There likewise was a “segment profitability breakout” that saw the company’s core commerce margin spiral to a 43% EBITDA margin, albeit a -8% margin for Cloud, -49% for Digital Media, and -87% for Other. Core Commerce delivers a whopping 82% slice of BABA’s revenues.

Looking ahead, “Initial guidance suggests sustained strong growth. Management expects FY19 revenue growth above 60%, including the impact of New Retail businesses and acquisitions, as the company continues to support its organic core commerce growth with aggressive investments and expansion initiatives,” contends Sebastian.

Colin Sebastian has a very good TipRanks score with a 74% success rate and one of the best rankings on the Street: #11 out of 4,773 analysts. Sebastian realizes 24.8% in his annual returns. Worthy of note, investors following Sebastian’s recommendation on BABA collect an average of 43.7% in profits on the stock.

Top analyst Youssef Squali at SunTrust may be bullish on BABA in the grander scheme, but he likewise recognizes some room for risk, explaining that a “lack of FY19 margin outlook overshadows impressive rev. guide/F4Q18 results.”

That said, the analyst maintains a Buy rating on BABA stock with a price target of $225, which implies a just under 19% upside from current levels.

“What we liked most about the quarter was that management continues to execute extremely well across virtually all of its operating segments, defying the gravitational law of large numbers, with the drivers of growth seemingly sustainable going forward. While doing this, management remains head down focused on expanding its TAM and aggressively investing in longer-term opportunities,” asserts Squali, who deems the company’s fiscal 2019 revenue guide as “surprisingly strong, even when adjusting for new non-organic initiatives.

Yet, this “a testament to the size of the opportunity ahead of the company and management’s strong execution against it. This break neck speed carries execution risks and is likely to come at a higher cost short term, however.” The analyst fears fiscal 2019 margins could face pressure and notes that without a fiscal 2019 bottom line or EBITDA guide, ” Short-term, this lack of visibility may create some head winds to the stock.”

Still, the analyst recognizes the fiscal 2019 guide “comfortably” outperforms both his and the Street’s revenue expectations. The company guided to more than 60% growth and beyond 50% organic growth, which “easily” shoots past his 44% year-over-year consolidated growth forecast as well as the Street’s 40%.

Bottom line, even if Squali highlights some near-term potential for risk, both he and Sebastian are overall highlighting confident perspectives on this Chinese e-commerce king.

Youssef Squali has a strong TipRanks score with a 70% success rate and an impressive ranking of #58 out of 4,773 analysts on Wall Street. In his annual returns, Squali yields 20.0%. When recommending BABA, Squali earns 24.4% in average profits on the stock.

TipRanks exhibits this e-commerce bet is a popular pick on the Street: all 14 analysts polled in the last 3 months are bullish on BABA stock. With a solid return potential of 26%, the stock’s consensus target price stands tall at $234.50.

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