China’s Alibaba Beats Earnings Estimates; Target Price $387 in Best Case

China’s Alibaba Group Holding, the largest online and mobile e-commerce company in the world, reported better-than-expected revenue in the third quarter, led by a rapid recovery of China’s economy from the COVID-19 crisis and growth in e-commerce business due to the pandemic.

The multinational technology giant said its total revenue surged 37% to 221.08 billion yuan, beating the Wall Street consensus estimate of 214.38 billion yuan. Alibaba said its net income attributable to ordinary shareholders was 79.43 billion yuan, or 28.85 yuan per American depository share (ADS), up from 52.31 billion yuan, or 19.55 yuan per ADS, seen in the same period a year ago.

China’s biggest online commerce company said its diluted earnings per ADS was 28.85 yuan per share and non-GAAP diluted earnings per ADS was 22.03 per share, an increase of 21% year-over-year. That was also higher than the market expectations of 20.59 yuan.

In the December quarter, cloud computing revenue grew 50% year-over-year to 6.12 billion, primarily driven by robust growth in revenue from customers in the Internet and retail industries and the public sector.

However, the suspension of a $37 billion IPO of Ant Group pushed the Alibaba’s U.S.-listed shares about 3% lower to $257.88 on Tuesday.

Executive Comments

“We delivered another solid quarter, with revenue growth of 37% year-over-year and adjusted EBITDA up 22% year-over-year, while our strong free cash flow enabled us to further invest in strategic areas,” said Maggie Wu, Chief Financial Officer of Alibaba Group.

“We are pleased that our Alibaba Cloud business achieved positive adjusted EBITA during the quarter and Cainiao Network was operating cash flow positive. These progresses reflect our long-term approach to organically incubate and expand businesses from launch to profitability.”

Alibaba Stock Price Forecast

Twenty-three analysts who offered stock ratings for Alibaba in the last three months forecast the average price in 12 months at $324.56 with a high forecast of $387.00 and a low forecast of $270.00.

The average price target represents a 26.23% increase from the last price of $257.11. From those 23 analysts, 22 rated “Buy”, one rated “Hold”, and none rate “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $320 with a high of $375 under a bull scenario and $195 under the worst-case scenario. The firm currently has an “Overweight” rating on the mobile e-commerce company’s stock.

Several other analysts have also recently commented on the stock. Alibaba Group had its price objective cut by Deutsche Bank to $319 from $360. They currently have a buy rating on the specialty retailer’s stock. Sanford C. Bernstein assumed coverage and issued a market perform rating on the stock.

In addition, Robert W. Baird boosted their price target to $325 from $275 and gave the stock an outperform rating. Mizuho reduced their price target to $300 from $325 and set a buy rating. Loop Capital boosted their price target to $350 from $280 and gave the stock a buy rating.

Analyst Comments

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 the increasing reliance on e-commerce and better conversion. Alibaba‘s ad resources remain under-monetized. F2022e non-GAAP P/E is 19x, which we think is attractive given expanded addressable market for its e-commerce and cloud businesses. Profitability improvement in cloud serves as a key share price catalyst.”

Upside and Downside Risks

Risks to Upside: 1) Better core e-commerce monetization drives earnings growth upside. 2) Faster enterprise digitalization re-accelerates cloud revenue growth. 3) Stronger expansion of cloud margins -highlighted by Morgan Stanley.

Risks to 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.

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