Yahoo Finance Why Alibaba Group Holding Ltd (BABA) Stock Could Gain 16%
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Alibaba Group Holding Ltd (NYSE:BABA) may not be a part of the “FANG” stocks, but there’s a strong case to be made that Chinese e-commerce conglomerate should be.
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BABA stock, which has skyrocketed 71% year to date, has punished those who continue to bet against it. Yet even with these strong gains, there are strong catalyst in play that can send BABA shares — currently trading around $150 — even higher.
Wall Street, for instance, has yet to take Alicloud seriously (it accounts for only about 5% of Alibaba’s total revenue), but Alicloud is poised to be a major profit producer. Especially as Alibaba expands the service beyond China.
Combined with the company’s monster growth projections for the fiscal year and next year, 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, calling for 15% upside from current levels.
On Thursday, citing the fact that more small businesses are joining its online community, Alibaba executive chairman Jack Ma issued bullish full-year forecasts, saying he expects revenue to grow by 45% to 48% percent.
“Our revenue this year, we will still have 45% to 48% growth, the money comes from solving problems for others,” Ma said, according to Reuters. This target, which is well above analysts’ revenue growth forecast of 35% for the year, calls for revenue of up to $34.3 billion, compared to revenue of $22.99 billion for the year that ended March.
The company is benefiting from revenue diversification beyond its core market, which gives it an advantage over the FANG names, according to JPMorgan Asset Management chief Asia market strategist Tai Hui.
In a recent Barron’s article, Hui noted that Chinese tech firms within the “BAT” group — referring to Baidu Inc (ADR) (NASDAQ:BIDU), Alibaba and Tencent Holdings Ltd (OTCMKTS:TCEHY) — are at a distinct advantage over their U.S.-based peers.
“If you look at the BAT, you have them not only doing social media and advertising, but they’ve stretched into the sphere of finance, asset management and logistics,” said Hui. “The Chinese technology ecosystem is much more capable of monetizing its platforms compared to some of the U.S. counterparts.”
Setting Up for the Future
In the case of Alibaba, the company has been pushing into new growth areas such as the cloud and pushing digital payments with its Alipay as its core market becomes more saturated.
Yet, China’s online spending is projected to be greater than the rest of the world combined within a few years. As such, BABA is aiming to capitalize on China’s middle-class population, which is expected to surpass 600 million in five years, equating to nearly twice that the size of the U.S. population.
This explains why BABA, accordion to The Economic Times could be interested in a minority stake in BigBasket, the largest online grocer in India, operating in roughly 25 cities. BABA is looking to capitalize on an India grocery market that is poised to explode in the next several year.
This is just one of may ways Jack Ma and BABA CEO Daniel Zhang are looking to keep the company relevant, regardless of what the markets bring. And that lack of insight by investors suggests that BABA stock — despite already crushing the market with year-to-date returns — can still drive higher, especially as the company remains on track to deliver its strongest underlying revenue rise since its 2014 IPO.
Bottom Line for BABA Stock
The wide discrepancy between BABA’s upbeat growth forecasts and what analysts expect suggest that Wall Street continues to underestimate BABA’s growth potential and the brilliance of Jack Ma.
From my vantage point, BABA stock, which has surged more than 33% in three months, has a clear shot to reach $175 in the next 12 to 18 months. And that’s a conservative target, given the momentum the company continues to make in the cloud, with its payment platform AliPay, driverless cars, among other endeavors.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
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