Alibaba (BABA): Wells Fargo Analyst Likes Advantages Unleashed with New ZTO Deal

Between Chinese delivery company ZTO's sheer scale and BABA logistics subsidiary Cainiao's capabilities, Wells Fargo's Ken Sena commends the company's newest deal.


Wells Fargo analyst Ken Sena is out serving up a bullish take on Alibaba Group Holding Ltd (NYSE:BABA) following the Chinese e-commerce titan’s deal with logistics subsidiary Cainiao to take a roughly 10% stake in Chinese delivery company ZTO Express at $1.38 billion. Consider the quicker road traveled to stronger logistics capability, bets Sena, who takes in stride another investment on the course to the company fulfilling its New Retail goals.

In reaction, the analyst reiterates an Outperform rating on BABA stock with a $230 price target, which implies an 11% upside from current levels. (To watch Sena’s track record, click here)

Even if the move indicates practically zero premium compared to where ZTO stock last closed, or 13% premium ahead of the average of April’s prices, the analyst asserts he understands how a “closer” alliance is poised to give BABA “collective” advantage. The deal poses “further strategic alignment” among ZTO Express, BABA, and Cainiao, where BABA happens to currently translate to a whopping 70% of ZTO Express’ volumes. Notably, ZTO suggested “continued openness” in terms of “other scaled marketplace experiences,” with Sena wagering takes JD.com under account. Next, while the $1.38 billion in investment certainly means an additional roughly $1 billion spent on logistics by BABA in 2017 (which already saw more than $2 billion in logistics investments), the analyst still recognizes this a meaningful area of investment.

“Specifically, not only does China represent a larger ecommerce market than here in the U.S. (at roughly 2x the scale and growing nearly twice as fast), but there is also opportunity for ecommerce platforms to play an even greater role in physical commerce, manufacturing, and grocery, all areas where Alibaba holds strong and growing position,” writes Sena.

The analyst continues, “ZTO expressed the investment as focusing on last mile / first mile, warehouse management, and cross boarder (i.e., freight forwarding and international logistics), where technology is expected to be a focused area. As such, we see ZTO’s scale and Cainiao’s capability to complete same-day and next-day delivery to nearly 1,500 districts and counties in China (in addition to its network of last-mile stations covering communities in the top 100 cities and around 1,800 university campuses across the country) as providing collective benefit to Alibaba. Bottom line, Sena sizes up more prospects waiting in the wings for this Chinese e-commerce titan, and the ZTO Express investment is absolutely “on mission” for the company.

Alibaba is a king of e-commerce as far as sell-side analysts are concerned, according to TipRanks analytics. All 14 analysts polled in the last 3 months unanimously rate a Buy on BABA stock. With a solid return potential of 24%, the stock’s consensus target price stands at $246.07.

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