Alibaba (BABA) Stock Price Target Trimmed at Wells Fargo; Here’s Why

It’s that time of the year again. Earnings season is just about to move into full swing, and some big tech names will report in just a few weeks. One company that attract lots of investor attention when it reports earnings is Chinese e-commerce giant Alibaba (NYSE:BABA).

In an earnings preview note released today, Wells Fargo analyst Ken Sena walked through several model adjustments, including a more difficult comparison for BABA’s customer management revenue, additional costs associated with Youku’s World Cup broadcasting rights, only a half quarter benefit of, as well as a one-time step-up in stock compensation related to Ant Financial’s recent financing and RMB depreciation.

As result, Sena is modestly trimming his 1Q19 and FY2019 estimates:

  • FY1Q19 – Total revenue decreased by 3.6% to ¥80.1 billion or $12.0 billion – approximately 2% lower than consensus. EPS reduced to ¥8.82 or $1.32 (vs. prior $1.40).
  • FY2019 – Total revenue decreased by 1% to ¥397.8bn/$59.7bn, and EPS lowered to ¥43.34 or $6.50 (vs. prior $6.66).

Reasons for the negative estimate revisions include:

  • Tough Comparison for Customer Management Revenue – BABA initiated an algorithm change in FY2Q17 (September, 2016), which benefited its FY1Q18 customer management revenue growth of 65.1% y/y. As result, for FY1Q19, BABA is facing a difficult comparison.
  • Youku’s World Cup Costs – The broadcast license fees, bandwidth costs, and marketing expenses are estimated to be approximately ¥2.2bn/$332.1mm, split 70-30 between 1Q and 2Q18.

Net net, Sena reiterates an Outperform rating on Alibaba stock, while trimming the price target from $250 to $240, which implies a 28% upside from current levels. (To watch Sena’s track record, click here)

Sena backed his bullish target noting, “We view this premium as justified in the face of the company’s clear data scale, leadership in China Cloud, and likely ability to extend such advantage beyond its core businesses to new industries and transaction types.”

Overall, the Street is definitively falling for BABA’s charms. Alibaba has a Strong Buy analyst consensus rating with 14 straight Buy ratings from analysts over the past three months. The $249.71 average analyst price target translates into 33% upside from the current share price.

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