BNP Paribas: Alibaba Faces Near-Term Headwinds, 'Further Margin Decline,' But Is Still A Buy

In a report published Friday, BNP Paribas analyst Vey-Sern Ling maintained a Buy rating on Alibaba Group Holding Ltd BABA, while reducing the price target from $102 to $100.

Analyst Vey-Sern Ling expects Alibaba’s top line to come under pressure in the near term due to:

1. Temporary suspension of online lottery sales, which is estimated to have a 2 percent GMV impact and 4 percent revenue impact
2. Price cuts on Juhuasuan in April, which is expected to impact monetization by 10bps or revenue by around 3 percent
3. PC take rate being 10bps lower y/y on account of “algorithm changes”

Alibaba’s core ecommerce business generates non-GAAP EBITDA margin in the high-50s. However, Ling expects margin to contract 4.7ppt y/y 48.8 percent in FY16 due to further investments in:

1. “Digital entertainment and content
2. Mobile platform and OS (including subsidies to handset manufacturers)
3. Increasing traffic acquisition costs from the expanding Taobao Affiliate Network”

In the report BNP Paribas noted, “Despite nearly full penetration of online shoppers, we forecast a 25% CAGR in GMV to USD1.2t in FY20, driven primarily by higher ARPU from existing customers. We believe the c100m new customers added in FY15 can increase spending multiple-fold as their confidence and familiarity with the platform improves.”

The EPS estimates for FY16, FY17 and FY18 have been reduced from $10.78 to $9.73, from $15.84 to $14.48 and from $19.02 to $19.33, respectively, to reflect lower revenue and margin estimates.