Let’s just put it out there: Alibaba Group Holding Ltd (NYSE:BABA) stock has fallen nearly 25% from its $120 highs back in November. Concerns over the sale of phony merchandise on its websites are mostly to blame, though market euphoria in the months following the record-setting $25 billion BABA IPO also surely played a role.
It’s time to disregard BABA stock’s recent underperformance, at least according to the Wall Street research firm Bernstein.
Bernstein’s Carlos Kirjner and his team believe BABA stock is heading right back to its $120 peak in the next 12 months, representing a 32% upside opportunity in Alibaba stock as of Wednesday’s close. This “outperform” rating deserves a closer examination.
Analysts Bullish on BABA
By no means is Bernstein the only prominent research outfit becoming more bullish on BABA stock. Goldman Sachs boosted its rating on BABA from “neutral” to “buy” less than two weeks ago, the same day Nomura upped its BABA price target from $119 to $137 per share.
While Bernstein outlines a wide variety of factors driving its bullish call on BABA stock, three of them struck me as being most important:
1. Wall Street is underestimating gross merchandise volume (GMV) growth in China:
Bernstein begins by noting that
“Alibaba has captured the vast majority (~80%) of the Chinese e-commerce GMV flow share last year, despite the fact that some of its smaller competitors (e.g. JD) have had higher growth rates.”
The analysts don’t see this trend changing anytime soon:
“We expect gross merchandise volume (GMV) for Alibaba’s China retail marketplaces, Taobao and Tmall, to grow at least 22% CAGR between calendar1 2014 and 2018, reaching RMB 5.0 trillion (US$ 800 billion). We estimate mobile will account for more than 75% of GMV by the end of 2016 and 90% by the end of 2018.”
2. The unfavorable comparisons to U.S. e-commerce dynamics don’t hold up:
Perhaps the most interesting point Bernstein had to make was really a counterpoint: Kirjner disputed the oft-made analogy between JD and BABA and Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY). JD doesn’t pose the same threat to BABA that AMZN did to EBAY:
“In part because of Alibaba’s relative size, in part because of its commitment to invest in many new opportunities (e.g., cloud, content, mobile), and in part because, unlike eBay ever did, it is clearly taking steps to ensure its merchants have access to competitive pick-pack-and-ship capabilities, we do not believe analogies between the relative trajectories of Amazon and eBay in the West and the future evolution of JD and Alibaba in China are meaningful.”
3. Bernstein expects margins to jump in the next year:
Says Kirjner:
“We believe margins will expand in the next year as (mobile) GMV monetization improves and headcount growth slows. We forecast F2017 EBITDA of RMB 77.5 billion, much higher than consensus’ RMB 70.4 billion, corresponding to an EBITDA margin of 55.1%, 162 bps higher than F2015’s margin.”
As BABA’s headcount growth slows, its margins should improve, which, when combined with revenue growth, means a whole lot of bottom-line moolah for anyone owning BABA stock.
Bottom Line
Any good analyst report worth its marbles acknowledges the risks to its crystal ball not coming through clearly. Kirjner concedes that there are some short-term risks to the BABA stock price, mentioning the expiration of a lock-up period in September that will allow a large portion of BABA stock to be sold.
However, he says, the biggest shareholders are unlikely to sell large portions of their positions, with the possible exception of Yahoo! Inc. (NASDAQ:YHOO), which may seek to spin off its BABA ownership.
While I don’t recommend buying and selling stocks based on analyst recommendations alone, they do provide a nice gauge of sentiment and elucidate the catalysts behind the business going forward, both of which serve a purpose for investors.
I think Bernstein is onto something here, and wouldn’t be shocked to see BABA stock make another run at $120.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
