As the US and China intensify their trade war, one company sets its hopes high and bets on Alibaba (BABA), a Chinese behemoth that even big e-commerce players on Wall Street feel intimidated with.
While US President Donald Trump threatened to slap China with fresh taxes on its imports, Beijing fired back by devaluing the yuan. Wall Street got paranoid, and the US market experienced its worst loss for the year. The aftershocks jolted top Chinese stocks, and that includes Alibaba.
Jefferies - an American multinational independent investment bank and financial services company - believes in the mass appeal that Alibaba projects, and with this, it initiated a "Buy" rating and a price target of $216 for the Chinese online retail giant, early Monday. Jefferies' argument: "Alibaba is a "strong cash cow model with huge potential."
Alibaba's total dollar market value of its outstanding shares is $411 billion. The company's stock has fallen 9.5% and last traded at 20.0% below its 52-week peak. Early Wednesday, the stock rallied 2.8% and traded at $157.80/share, with a forward price to earnings ratio multiple of 18.3x.
Comparatively, Alibaba's earnings per share are seen to expand 21.1% in this year and 27.8% in 2020, proving that the stock is undervalued. Wall Street has a 12-month average target aim of $217.88 for BABA, which is 38.0% above the firm's current market price. Year-to-date, BABA has grown 14.6%.
Alibaba's stock currently sells for a whopping 46 times trailing earnings. As such, probably it is not a stock many will find on value investors' bucket list. But this does not worry Jefferies, however, which stresses that the company's solid marketplace model gives the company huge potential.
In the last five years, the Chinese e-commerce giant has boosted its revenue at a compounded yearly rate of almost 50%, and increased its profits at a solid 31%, based on figures by S&P Global Market Intelligence. However, Jefferies does not believe such impressive numbers will remain forever, but it does have faith that the company's marketplace revenue will soar at least 30% in 2020.
But one analyst seems to take Jefferies "Buy" rating with a grain of salt. Steve Weiss of Short Hills Capital Partners, who unloaded stocks of Alibaba recently, said "I sold just because you can't have those kinds of trades in this kind of environment. And it dropped like a rock."
According to Weiss, the Chinese are experiencing their own "economic issues, obviously... I just don't believe it's the stock to play at this point."
With regards to where that extra growth is coming from, Jefferies argues that "data insights and high return on investment marketing tools" will translate into "an increasing number of paying merchants" on Alibaba's platform, yielding an increase in "paid clicks." Alibaba's cloud computing unit is another area seeing strong growth, with sales up 72% last year, according to S&P Global data.
