Alibaba (BABA) Stock Stands to Gain from ‘Important’ Transition in Advertising Model, Says Mizuho

Chinese e-commerce giant Alibaba (BABA) is known for its e-commerce prowess. The company is arguably Amazon’s biggest competitor in online retail and has a robust distribution network throughout the US and China. But the company is showing that it is more than just a seller of goods; its cloud platform is among the largest in the world and its investment arm is proving lucrative, too. Beyond that, analyst James Lee of Mizuho is focused on Alibaba’s advertising model.

Lee believes Alibaba is going “through an important transition in advertising model from DR (search) to Branding (newsfeed).” Alibaba will use its massive collection of data to “drive discovery for existing and new customers” for products and services they may like, instead of its old way of search engine-style ad placements.   

While Lee does not expect this to take place overnight; because of economic uncertainty, he expects newsfeed monetization to be “postponed.” Based on Facebook and Amazon case studies, Lee believes “that it will take several quarters to resolve…and (estimates) that ad revenues will accelerate in mid FY20 and deliver a CAGR of nearly 29% from FY18 to FY22.” 

As retail is still Alibaba’s core business and revenue driver, Lee is excited about the company’s prospects over the next few years. He reports that the company plans to grow through a nework of retail stores and a strengthening grocery segment. By FY2022, Lee estimates “that Alibaba will capture around 26% of China’s retail market,” but expects heavy investment which will decrease “core retail EBITA margin…to 37% in FY22 from 44% in 1HFY19.” 

Lee has resumed coverage of Alibaba shares, with a Buy rating and price target of $200, which implies 34% upside potential from current levels. (To watch Lee’s track record, click here)

The Street shares this upbeat outlook. With a Strong Buy analyst consensus, the company’s $204.61 average price target speaks of 38% upside potential ahead. (See Alibaba’s price targets and analyst ratings on TipRanks)

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