Alibaba Posts Strong Q2 Revenue as COVID-19 Crisis Boosts Online Business; Target Price $290

Alibaba Group Holding Ltd, the largest online and mobile eCommerce company in the world, said its revenue surged 35% year-over-year in the second quarter, largely due to growth in core commerce and cloud computing businesses, which has been accelerated by the COVID-19 pandemic.

The Chinese multinational technology company said its Q2 revenue rose to 153.75 billion yuan, an increase of 34% year-over-year. Alibaba’s net income attributable to ordinary shareholders more than doubled to 47.59 billion yuan from 21.25 billion yuan.

Alibaba said its annual active consumers on China retail marketplaces reached 742 million, an increase of 16 million from the 12 months ended March 31, 2020. Mobile MAUs on China retail marketplaces reached 874 million in June 2020, an increase of 28 million over March 2020.

Net income attributable to ordinary shareholders was 47,591 million yuan, and net income was 46,437 million yuan. Non-GAAP net income was 39,474 million yuan, an increase of 28% year-over-year.

Alibaba’s shares traded about 2% lower at $158.28 on Thursday. However, the stock is up over 20% so far this year.

Executive comments

“We delivered a very strong start to our new fiscal year, with revenue growing 34% year-over-year and adjusted EBITDA growing 30% year-over-year,” said Maggie Wu, Chief Financial Officer of Alibaba Group.

“Our domestic core commerce business has fully recovered to pre-COVID-19 levels across the board, while cloud computing revenue grew 59% year-over-year. Our strong profit growth and cash flow enable us to continue to strengthen our core business and invest for long term growth.”

Alibaba stock forecast

Twenty-one analysts forecast the average price in 12 months at $278.05 with a high forecast of $316.00 and a low forecast of $216.00. The average price target represents a 6.70% increase from the last price of $260.59. From those 21 analysts, 20 rated “Buy”, one rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley target price is $290 with a high of $344 under a bull scenario and $169 under the worst-case scenario. Alibaba Group had its price target increased by Truist to $242 from $240. They currently have a buy rating on the speciality retailer’s stock.

Other equity analysts also recently updated their stock outlook. Nomura restated a buy rating and issued a $309.00 target price on shares of Alibaba Group. Oppenheimer restated a buy rating and issued a $260.00 price objective.

Analyst view

“COVID-19 has accelerated e-commerce penetration, especially in FMCG (fast-moving consumer goods), the next core category for e-commerce. Alibaba is set to benefit from this secular trend, given its leading position, and we expect it to maintain >50% market share over time, thanks to its strong ecosystem,” said Gary Yu, equity analyst at Morgan Stanley.

“In addition, merchants’ marketing budgets will continue to shift online given increasing reliance on e-commerce and better conversion. Alibaba’s ad resources remain under-monetized. Our new target implies 25x F22e P/E, in line with the average since 2017. Despite its recent rally, BABA’s NTM forward P/E discount to Tencent is deeper than the historical average of 20% since 2017,” he added.

Upside and Downside risks

Upside: 1) Better core e-commerce monetization drives earnings growth upside. 2) Faster enterprise digitalization re-accelerates cloud revenue growth – highlighted by Morgan Stanley.

Downside: 1) Intensified competition in less-developed regions would slow down GMV growth and pose downside to margins. 2) Lingering macro headwinds may pressure discretionary spending in China and affect our GMV and earnings forecasts.