Why Credit Suisse Is Changing Baidu and Alibaba Upside Targets Handily

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It is more common than many investors might guess, but analysts often change roles within firms or they go to other firms. Credit Suisse has two new notes out on July 21, with an analyst assuming coverage of both Baidu Inc. (NASDAQ: BIDU) and Alibaba Group Holding Ltd. (NYSE: BABA). Both ratings are positive, but the price target changes in the new coverage are in different directions.

Credit Suisse is still calling for handy upside in both companies. Evan Zhou and Angela Zhou assumed coverage on Baidu and gave a $190 price target, which is actually lower than the prior $245 call from Credit Suisse. Evan Zhou and Monica Chen assumed coverage on Alibaba with an Outperform rating, but the $114 price target compares to a prior target of $100.

Baidu’s Outperform rating has a sum-of-the-parts target of $190, despite challenges in its core search slowdown. Credit Suisse noted that the extent and length of any impact may not yet be fully reflected in street estimates. New initiatives like artificial intelligence, driverless cars and deep-learning may not materialize into earnings in the coming two years. Still, Credit Suisse sees Baidu delivering normalized growth in core search and expects Baidu to keep unlocking value from takeout delivery, Nuomi and iQiyi.

The core statement here is that Credit Suisse sees limited near-term catalysts in Baidu, so its Outperform rating comes with the caveat that investors should gradually accumulate Baidu shares on weakness:

Although search has been facing regulatory and secular headwinds, we think it is still one of the most efficient and effective way of reaching customers. We expect 10% to 15% long term growth and think 12.5x as a reasonable multiple given better ROE and cash flow compared to traditional sectors. … Besides core search, we expect Baidu to continue the process of unlocking shareholder value through the proposed spin-off of iQiyi and potential future events for Baidu Takeout Delivery and Nuomi. Our estimates for iQiyi are at the higher-end of street and think iQiyi worth more than $2.8 billion from the MBO offer, due to substantial growth in subs and non-ad revenue. We value Baidu’s overall portfolio of smaller investments at about $2.0 billion.

On the $190 sum-of-the-parts valuation, Baidu’s core search is valued at $127.20, and $19.50 for O2O, $8.10 for iQiyi, $13.50 for Ctrip, $5.80 for investments and $15.90 for net cash. That target price also implies a valuation of 42 times 2016 and 28 times 2017.

Baidu was last seen trading around $161, in a 52-week range of $100.00 to $217.97 and with a consensus analyst price target of $195.13.

On Alibaba, again, the $114 price target is higher than the prior $100 target. Unlike Baidu, the team is recommending that investors accumulate Alibaba at the current level.

Alibaba was praised for a solid cash-generating core commerce market expansion in key new categories and regions. It was also gradually more visible value creation from four key growth assets (Ant Financial, Cloud, Cainiao and Koubei), and satellite investments are expected to unlock future value in O2O retail and services, media and entertainment, and frontier technologies.

Credit Suisse noted on Alibaba:

While the market is still debating on whether we should use sum of the parts to evaluate the intrinsic value of Alibaba, we have already started to see early signs of business breakthroughs in new categories and some of its burgeoning growth assets: Cloud, Cainiao and Koubei. This is prompted by the re-focusing of management’s resolution in actively competing in key battlefields, as well as previous three to five years of devotion in technology and business model experiments.

Credit Suisse did warn of risks from near-term performance, high logistical costs, sluggish new category expansion, and content acquisition costs. Still, the upside catalysts were listed as follows:

  • Sustained decent gross merchandise volume (GMV) growth and monetization rate improvement for core business
  • Breakthroughs in new categories and regions
  • Improved disclosure by business segments for better visibility into new initiatives
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Credit Suisse switched its main valuation methodology to a sum-of-the-parts analysis. That new $114 price target includes a core business value of $86 per share, $7.80 per share for Ant Financial, $5.60 per share for Cloud operations and $14.00 per share for all the other assets (including net cash). That value also implies earnings multiples of 36.9 for 2017 and 26.2 for 2018.

Alibaba was last seen trading at $84.42, in a 52-week range of $57.20 to $86.42. Alibaba’s consensus price target is $96.56.