J.P. Morgan Sees 16% Upside for Alibaba (BABA) Stock Ahead of Earnings


Since US-China tensions resumed a few months ago, Alibaba (BABA) stock had been on shaky ground. But with US President Donald Trump and Chinese President Xi Jinping meeting at the end of June and agreeing to suspend new tariffs, shares have risen as investors are more confident a solution will come soon. This is a good sign for Alibaba — the company relies on a strong US-China relationship and can do without the distractions or tensions.

Ahead of Alibaba’s upcoming earnings report, analyst Alex Yao of J.P. Morgan maintains his Overweight rating on the stock, with a $200 price target, which implies nearly 16% upside from where the stock is currently trading. (To watch Yao’s track record, click here)

Looking at earnings, Yao expects “customer management revenue (CMR) to decelerate moderately in 1QFY20,” but still produce a strong 28% year-over-year growth (compared to 31% in Q4). The analyst sees “potential upside risk to [his] earnings forecasts, due to subdued subsidy in local consumption and moderating video content cost,” and he expects customer management and commissions (“Core-Core”) revenue to “deliver a resilient 27% YoY growth this quarter.” 

Yao remains “positive on BABA’s mid-term earnings outlook.” He says the company “has the flexibility on when to pull the trigger on feeds monetization to accelerate ‘Core-Core’ growth…[and expects a] subsidy cut on food delivery and content cost reduction…” Though lacking in clarity, “the major swing factor would be the financial impact from lower-tier city expansion.”

Alibaba continues to grow very rapidly. In its last quarter, the company reported core commerce revenue beat estimates by 5%, increasing 51% year-over-year. Its cloud segment also continues to grow, up 76% over the year. Alibaba is increasingly playing a larger role in people’s lives beyond the computer. The company’s smart speaker is integrating more content offerings, including literature and music. Similarly, the company is investing in startups, including recently $150 million in Knowbox, a Chinese education mobile app. 

All in all, as the US and China continue to work towards a resolution, Alibaba and its investors are expected to reap the benefits. While shares dipped when tensions rose, the recent Trump-Xi meeting showed the two are looking to end the conflict which sparked the stock higher. TipRanks analysis of 15 analyst ratings agrees with this, showing a consensus Strong Buy, with all 15 analysts recommending Buy. There is a $220.79 price target on the stock, representing a 26% upside. (See BABA’s price targets and analyst ratings on TipRanks)

 

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