Though the Fed did not cut rates as much as hoped and a lack of progress continues to be made in ending trade disputes with China, American markets have fared well in recent months. Major indexes are only down roughly 3% from late July highs, and Q2 earnings reports have generally exceeded consensus predictions. An impressive 76% of the S&P 500 companies that have reported for the quarter beat expectations, and equities across the board are performing relatively well.
While the US economy manages to tread water, a much larger question mark surrounds the current macro conditions in China. As tariffs take their toll on trade, many investors remain uncertain on the present strength of the Chinese economy.
That said, all eyes are on many of the upcoming earnings reports for the companies most directly exposed to these tariffs; tomorrow, Chinese e-commerce titan Alibaba (BABA) will report fiscal first quarter results just before the opening bell. If Alibaba can prove to be unaffected by the impact of the trade war on a shaky Chinese economy, the stock has lots of potential to rally.
5-star SunTrust analyst Youssef Squali believes the massive scaling and steady domestic growth is likely to offset effects of the trade war and, as a result, he reiterates a Buy rating and $205 price target on Alibaba stock. For perspective, the stock closed at $164.03 yesterday, so this implies upside of about 25%.
As always, we like to give credit where credit is due. According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, Squali has yielded a yearly average return of 25.6% with a 71% success rate. Squali has earned an average return of 22.7% when recommending BABA and is ranked #32 out of 5,239 analysts.
Ahead of the print, Squali anticipates quarterly net revenue of 112B RMB (+36.1% Y/Y) vs. consensus of 111.8B RMB. The analyst also forecasts EBITA of 24.5 RMB vs. consensus of 29.4B RMB.
Squali recognizes the fact that BABA’s overall margins are not what they could be, and that’s okay. Similar to Amazon, Alibaba is investing in areas other than e-ecommerce, such as cloud services and digital media and entertainment. Having faced profitability issues in each of these industries, BABA’s financials are not as sexy as they could be. However, with a growing presence in multiple industries in combination with a rapidly growing Chinese middle class, Squali believes that the e-commerce giant is in good hands.
Controlling a massive 80% of China’s total online spend, Alibaba is the the country’s largest domestic e-commerce platform. As the company continues to widen its reach across both China’s rural markets as well as its growing middle class, Squali believes that BABA has a higher floor than most of its competitors and still exhibits plenty of room for growth.
During China’s 6.18 Mid-Year Shopping Festival, the retail giant proved that not only are sales increasing among consumers in major cities like Shanghai and Beijing, but they’re also on the up among consumers in “lower-tiered cities” such as Qingdao and Shayang.
All in all, with its core business stronger than ever, Alibaba is in a very good position to focus on moving toward profitability in its other businesses. Additionally, as the conglomerate’s offerings have grown, its customer demographic has followed.
TipRanks showcases an equally optimistic perspective on BABA. Of the 18 analysts polled within the last three months, all of them believe you should ‘buy’ the stock. With a consensus price target of $218.94, this Strong Buy stock exhibits nearly 36% upside potential from current levels. (See BABA’s price targets and analyst ratings on TipRanks)