Alibaba’s (BABA) end of year office party should be a good one. The Chinese e-commerce and cloud computing giant notched a yearly high on December 17, closing Tuesday’s trading session at $208.18. The new peak comes as we approach the end of a stellar 2019, when despite periodic macro headwinds, the internet behemoth’s 52% increase in share price has easily outpaced the S&P 500’s excellent 27% gain. Word on the Street is that the growth is not about to slow down anytime soon, either.
Stifel’s Scott Devitt recently met up with Alibaba’s Head of Investor Relations, Rob Lin, and in a report to clients, the 5-star analyst noted key takeaways. Let’s have a look at some of the analyst’s findings.
The company highlighted its intention of “reinvesting profits and leveraging synergies for operating efficiencies”, with the majority of investment focusing on local services, logistics, and international. Based on the results from its most recent quarter, the company’s digital entertainment sector remains a key part of the business. EBITA losses decreased by 40% year-over-year as spending became more disciplined and investments continue to be “strategically allocated.”
Investors see the monetization of the Taobao recommendation feed as “a key topic of interest” due to “the potential for increased ad-load over time.” Devitt adds, “Today ads are in the middle of the recommendation feed and in addition to load, ad placement could change over time and create additional monetization tailwinds.” As management previously noted, the level of ad-load is not likely to increase in full year 2020, as the company is presently on a “comfortable trajectory without pulling additional monetization levers in the near-term.”
Lower-Tier City Growth
The consumer base in lower-tier cities remains significantly untapped, with Alibaba noting there is vast growth opportunity as it has “lower tier customer penetration of ~40% versus ~85% penetration of tier one and tier two cities.”
Successful Hong Kong Listing
Prior to the late November listing on the Hong Kong Stock Exchange, Alibaba was only listed in the US. The added listing was a “strategic move to increase capital markets liquidity” and provides access to Alibaba shares for investors located in the company’s home region. The Chinese tech titan’s listing has so far been a resounding success and Alibaba now has more than $25 billion in net cash on the balance sheet.
The Bottom Line
Devitt concludes his report by noting, “Alibaba is the largest eCommerce company in the world with its core business supported by an asset-light, commission / advertising model. Alibaba holds well over half of market share of China online shopping. Investments in cloud services, local services, content, and multichannel retail should improve long-term monetization and the competitive position. International expansion is still in the early stages and presents an attractive long-term opportunity.”
Devitt, therefore, reiterated a Buy rating on BABA. The 5-star analyst thinks a price target of $220 can be achieved over the next 12-months, indicating upside potential of 6%. (To watch Devitt’s track record, click here)
What’s in store for the e-commerce heavyweight, according to the Street? As it happens, the Street is also enamored with BABA, and is unanimous in singing its praises. With a breakdown of only Buys, 18 of them to be precise, the consensus is that Alibaba is most definitely a Strong Buy. An average price target of $237 indicates gains of 14% could be in the cards over the next 12 months. (See Alibaba price targets and analyst ratings on TipRanks)
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