Alibaba Group Holding Ltd (BABA) Stock Will Set New Highs Soon

Price target hikes, upward revisions to estimates and recent history point to a BABA profit beat this week

Investors in Alibaba Group Holding Ltd (NYSE:BABA) are looking for Wednesday’s earnings to serve as the catalyst that reignites BABA stock now that it has cooled off from an all-time high.

Alibaba stock BABA

It’s probably not a bad bet. BABA beat Wall Street’s profit and revenue estimates by a wide margin three months ago, and there’s reason to think it will do so again. Some analysts are optimistic about Alibaba’s chances.

Citigroup’s Alicia Yap lifted her target price on Alibaba stock to $133 from $112 last week. It’s an extremely bullish call. The analyst’s new price target gives BABA stock implied upside of 30% in the next 12 months ago.

From the note to clients:

“We maintain our Buy rating and raise our target price to US$133 (from $112) based on 30x (unchanged) PE rolling forward to FY2018E non-GAAP EPADS of US$4.17 and a 33% potential equity stake in Ant Financial (based on latest valuation of US$60bn). We have adjusted our FY2017E and FY2018E revenues/non-GAAP EPADS by -1%/-6%, 0%/-4%, respectively incorporating potential higher expenses from: 1) stepped-up video content investment; 2) Tmall Supermarket promotion and higher Singles’ Day spend; and 3) slower profitability timing for Cloud business due to the latest price cut strategy.”

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It sure wouldn’t be out of character for Alibaba stock to tack on another 30%. It’s up 25% for the year-to-date even though it has  hit a soft patch.

Indeed, BABA stock has been drifting downward ever since it notched a record high about a month ago. More worrisome, it recently failed to find support at its 50-day moving average.

Alibaba stock could really use some better-than-expected earnings right about now

More Bullishness on BABA Stock

Happily, investors are more than likely to see that happen. From J.P. Morgan’s Alex Yoo last week:

“We expect Alibaba’s total revenue to grow 52.3%YoY in Sep Q and full-year FY17 topline growth to be +49%YoY. We believe increasing user engagement and growing ad inventory should continue to drive solid revenue growth of core commerce business and the growth momentum of non-commerce initiatives such as Cloud and UCweb should also be very strong. Margins however may see some pressure given 1) the consolidation of Youku and Lazada; and 2) the investment in new projects such as online supermarket and rural Taobao (JPMe non-GAAP EBITDA margin to be 45.4% in Sep Q, -4.9ppt YoY).”

The way BABA stock is moving lately, it doesn’t seem to appreciate the accelerating top line.

Even if Alibaba earnings only match Street estimates, the top-line growth rate is still stunning. Analysts on average expect Alibaba to post revenue of $5 billion. That more than 40% above last year’s revenue of $3.49 billion.

On the bottom line, the Street is looking for earnings per share of 69 cents, from 57 cents a year ago. That would represent a leap of more than 20% in EPS.

Separately, Alibaba on Monday restructured its media and entertainment units into a new digital media arm. Additionally, it announced a new fund of $1.48 billion aimed at financing new projects. The restructuring includes video site Youku Tudou, mobile browser UCWeb, film company Alibaba Pictures and Alibaba’s sports, games, literature, music and digital entertainment businesses, Reuters reports.

Getting back to the stock’s prospects, analysts are bullish in a big way. Of the 39 analysts reporting to Thomson Reuters, 35 call Alibaba stock a buy.

BABA stock has tremendous growth prospects for a company with a market cap of more than $250 billion. As Goldman Sachs analyst Piyush Mubayi wrote:

“We continue to believe that the outlook for organic growth rates and China retail margin remains robust for BABA. (1) We foresee continued top-line growth (FY2017E-19E revenue CAGR of 28%) across key segments including ecommerce, payments, media and cloud…”

Given that and more, it’s pretty easy to be bullish on Alibaba stock.

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

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