On the heels of Alibaba (NYSE:BABA) revealing plans to purchase online food delivery platform Ele.me for a smooth $9.5 billion, Wells Fargo analyst Ken Sena crunches the numbers of the financial impact. More importantly, the analyst continues to survey BABA with a bullish light, finding the move fits nicely within the scope of the Chinese e-commerce king’s revamped retail strategy.
As such, the analyst reiterates an Outperform rating on BABA stock with a $220 price target, which implies a close to 27% upside from current levels. (To watch Sena’s track record, click here)
For context, BABA and its affiliate Ant Financial already have a stake of roughly 43% of Ele.me’s voting shares- the deal broadcasted Sunday is to buy out the rest of the outstanding shares.
Sena highlights, “Our view is that while Ele.me will modestly lower BABA’s margin during the near term, and an argument can be made that a significant premium was paid, there is supporting strategic rationale to this deal, where we see synergies with BABA’s existing local businesses and affiliates such as Hema Fresh Foods, Koubei, and Alipay, and we see this as consistent with Alibaba’s broader new retail initiative.”
When sizing up Ele.me along with its Baidu Delivery, the analyst anticipates a roughly 2% contribution to Alibaba’s fiscal 2019 China retail gross margin value (GMV) and an estimated 4% contribution to revenue. However, the analyst acknowledges expectations for a “drag” on non-GAAP operating margin.
“This assumes that Ele.me follows a similar seasonality to BABA’s other local business, Koubei, and that the transaction closes in June,” adds the analyst. In reaction the deal, the analyst has boosted his fiscal 2019 revenue expectations for the company up to $55.8 billion, which suggests 42.9% year-over-year growth- against prior growth of 37.1% year-over-year. Additionally, to account for the drag, the analyst has scaled back his non-GAAP operating income forecast for fiscal 2019 to $16.5 billion, or a 29.5% margin compared to a prior margin of 32%.
“We also note that as a result of the Alipay promotion during the Chinese New Year, in addition to some adjustments in interest and investment income, we have reduced our 4QFQ18 below-the-line Pretax Income by 19% to ¥9.6bn/$1.5bn. And on little changed revenue estimate of ¥57.8bn/$9.2bn (49.9% y/y) and EBITA of ¥17.5bn/$2.8bn (or 30.3% margin), our 4FQ18 EPS estimate is now ¥5.77/$0.92 (vs. prior ¥6.47 and Street’s ¥6.07),” concludes Sena.
Alibaba’s name is a strong bullish favorite among analysts, according to TipRanks analytics. Consider that all 18 analysts polled in the last 3 months rate a Buy on the Chinese e-commerce king. With an encouraging return potential of 34%, the stock’s consensus target price stands at $233.94.