Why Oppenheimer Got So Bullish on Alibaba

Alibaba Group Holding Ltd. (NYSE: BABA) has seen its shares trade higher and higher, although we may have seen a small sell-the-news reaction to the good news about Singles Day in China. Now we have word that Oppenheimer’s analyst Ella Ji has initiated coverage of Alibaba with an Outperform rating and a whopping $133 price target. What stands out here most is that the highest analyst price target at all other brokerage firms on Wall Street is $135.

So, 24/7 Wall St. wanted to see what Ji has gotten so excited about to make for a consensus price target that is almost the highest on Wall Street and about 10% higher than the consensus price target.

The Alibaba dominance in e-commerce is represented by the largest user base and unmatched user engagement, with some 50 orders per active customer in 2014. That is exponentially higher than average orders for, and other Chinese peers.

Another boost was from a solid core growth profile, indicating that Alibaba’s Taobao and Tmall will deliver consolidated growth of 14% and 46% from 2014 to 2019 in gross merchandise value. The firm expects that Taobao will be Alibaba’s business hub that feeds traffic to the more profitable Tmall, as well as others in its ecosystem.

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Oppenheimer said:

The world’s largest online/mobile commerce platform has now developed to be one of the most comprehensive ecosystems globally. In this report, we not only discuss Alibaba’s listed assets (e-commerce and cloud), but also provide a detailed analysis of its entire ecosystem, which adds substantial breadth & depth to the listed company. Together, they build up a long-lasting competitive barrier to entry & directly enhance the listed company’s top-line growth and margin profile. We think BABA is one of the best-positioned companies in the China Internet space by virtue of its strong brand, large and loyal customer base, and compelling network advantage.

Other key drivers were as follows:

  • Significant upside for mobile, expected to drive 70% of growth in next five years
  • Alibaba’s strategic layout in O2O with expected investments to bear fruit over time
  • Tmall Global expected to be a leader in the nascent $25 billion crossborder inbound e-commerce market in China
  • Improving complementary services such as its data management platform that help merchants with
    user growth and stickiness and eventually will benefit Alibaba

Oppenheimer’s $133 price target equates to a price-to-earnings (P/E) ratio of 43, on top of the firm’s 31% earnings per share growth and fiscal 2016 earnings of $3.10 per share. Oppenheimer’s analysis also projects a potential benefit of $6.70 per share from Ant Financial, prior to any tax consequences.

Alibaba shares were indicated down 1.6% at $117.25 in the early indications on Tuesday and opened at about $117.23. Its post-IPO trading range has been $82.81 to $119.45.

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