Why Alibaba Group Holding Ltd (BABA) Stock Will Reach $160

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It still amazes me that few investors actually understand how Alibaba Group Holding Ltd (NYSE:BABA) makes money. That lack of insight suggests that BABA stock — despite already crushing the market with 57% year-to-date returns — can still drive higher.

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Not to mention, in the process, the Chinese conglomerate is going to bring even more pain to those who continue to bet against it.

BABA stock, which has surged more than 30% in three months, closed last week at $143.01. And given the momentum the company continues to make in the cloud, with its payment platform AliPay and driverless cars, among other endeavors, Alibaba has a clear shot to reach $160 in the next 12 to 18 months.

Reasons to Love Alibaba

Think of retail and e-commerce dominance and you usually think of Amazon.com, Inc. (NASDAQ:AMZN). But Alibaba, often referred to as “China’s Amazon,” wants to play second fiddle to no one.

Alibaba Chairman Jack Ma — his respect for Amazon CEO Jeff Bezos notwithstanding — has made that point clear on more than one occasion. Ma in April glowed about his company’s potential, particularly in the Chinese market, which he says presents “tremendous opportunities.”

“By next year, China’s online spending will be greater than the rest of the world combined,” Ma boasted. Adding, “At Alibaba, we want to help you take advantage of this appetite for consumption through our e-commerce marketplaces.”

China’s middle-class population is expected to surpass 600 million in five years; that’s nearly twice the size of the total U.S. population. Wall Street has already begun to do that math.

Assuming China’s middle class grows as predicted, the rise in incomes of Chinese consumers will fuel demand for high-quality products. And Alibaba growth will continue as it meets those demands. It’s for this reason the company — at its investor day earlier this month — forecast massive revenue growth of 45% to 49% for the current fiscal year which ends in March.

This target, well above analysts’ 35% forecast, implies revenue of up to $34.3 billion.

Wide Discrepancy With Wall Street

Maggie Wu, Alibaba’s CFO, reminded that the guidance puts the company on track to deliver its strongest underlying revenue rise since its 2014 IPO. Meanwhile, CEO Daniel Zhang generated even more amazement by suggesting that BABA’s gross merchandise volume could reach $1 trillion in only three years, rising from $547 billion in 2016.

 

In other words, the wide discrepancy between the company’s forecasts and analysts’ expectations shows that Wall Street not only continues to underestimate this company, but simply doesn’t understanding BABA’s business.

Alibaba, unlike Amazon, doesn’t warehouse much of what it sells. Instead, the main business model, as its “marketplace” suggests, involves facilitating business transactions. Its main goal is to bring consumers together with millions of small producers and retailers around the world.

Yet, some investors insist on worrying about the Alibaba’s profit margins, which is a mistake. It’s more important to focus on the extent to which the company is growing its platform and its ecosystem, while building its business in fast-growing areas such as the cloud, where Amazon and Microsoft Corporation (NASDAQ:MSFT) dominate.

Bottom Line for BABA Stock

Despite the recent increases in Alibaba, there are strong factors that can send these shares higher.

Take Alicloud, for one. Analysts have yet to give Alicloud its due, likely because it only accounts for about 5% of Alibaba’s total revenue. As with Amazon, Alicloud is poised to be a major profit producer for BABA, especially as the company is now looking to expand the service beyond China.

Combined with the company’s monster growth projections for this fiscal year and next, BABA stock deserves multiple of expansion of at least five points above 2018 estimates of $5.93 per share, which puts BABA stock at a fair value of $160, or 12% upside from current levels.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/why-alibaba-group-holding-ltd-baba-stock-will-reach-160/.

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