Is Alibaba (BABA) ‘Take Rate’ Upside Underestimated? This Bull Makes a Case

Raymond James' Aaron Kessler now anticipates 52% in return potential for his 'top large cap pick' Alibaba stock.


Alibaba (NYSE:BABA) could boast undervalued potential in take rate upside, which is giving Raymond James analyst Aaron Kessler reason to get even more confident on the Chinese e-commerce king. For context, the ‘take rate’ is the percentage of gross merchandise value (GMV) that spills into revenues. Kessler believes investors are not taking enough into consideration how strong this variable could be for long-term prospects and earnings power. After all, take rate boosts ramp up meaningful earnings leverage.

As such, the analyst reiterates a Strong Buy rating on BABA stock while bumping up the price target from $250 to $300, which implies a 52% upside from current levels. (To watch Kessler’s track record, click here)

Here’s why Kessler fired up his already bullish expectations on this top large cap pick: “1) We expect continued robust China eCommerce growth with Alibaba as the biggest winner (~70% market share); 2) Take rate upside is underappreciated – 3.3% in FY18 with potential for mid-high single digits (should add ~10 points a year to retail growth); 3) Take rate increases drive significant leverage to model. We do not believe investors are currently valuing long-term potential for take rate upside and earnings implications.”

When glancing ahead to the upcoming few years, the analyst wagers GMV has good odds to keep a pace of 20% growth. The analyst calls for robust China e-commerce GMV growth on back of the following: 1) China’s growth consumption coupled with a rising consumer and middle class 2) an traditional retail market that boasts opportunity, as it is “underdeveloped” 3) ramping mobile commerce 4) better logistics. Kessler runs the numbers and calculates the company has grabbed roughly 70% share of total China e-commerce from Taobao (C2C) as well as Tmall (B2C). Just last year, Tmall held around 57% market share of B2C, and the analyst bets BABA’s GMV leaped 2.7 times the size of fellow e-commerce king Amazon in 2017.

Kessler writes, “Take rate upside underappreciated: should continue to drive ~10 points a year of core retail growth. In FY18, Alibaba reported a take rate of ~3.3% (vs. ~13% for Amazon referral fees, ~8% for eBay, and ~7% for MercadoLibre.) We believe Alibaba has multiple take rate levers including increased personalization and targeting, increasing ad load, increased competition for ad slots, additional inventory expansion, as well as increases in commission rates on Tmall. Recent management commentary and robust FY19 guidance suggests confidence in continued monetization levers.”

In a nutshell, stellar GMV gains coupled with hikes in take rate are primed to be a catalyst for China retail marketplace revenue growth of more than 25% throughout the upcoming years, with Kessler predicting 40% in 2019 and 32% in 2020. Down the line, the analyst expects the company can hit a mid-high single digit take rate.

TipRanks underscores that this Chinese e-commerce king is a Wall Street darling, with all 14 analysts polled in the last 3 months rating a Buy on BABA stock. With a healthy return potential of nearly 25%, the stock’s consensus target price stands at $246.07.

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