Alibaba Has 40% Upside: Here's Why

While Alibaba Group Holding Ltd’s BABA core commerce should continue to deliver healthy GMV growth, the company’s non-commerce initiatives are expected to become earnings contributors in the medium to long term, JPMorgan’s Alex Yao said in a report. He maintained an Overweight rating on Alibaba, while raising the price target from $129 to $135.

Core Commerce

Alibaba’s core commerce is expected to generate a GMV CAGR of 15 percent from CY17 to CY19, backed by improving monetization, with growth in take rate accelerating from an estimated 3.35 percent in CY17 to 3.60 percent in CY19. Analyst Yao mentioned that this growth would likely be driven by:

1. Increasing user engagement
2. Increasing value proposition to merchants.

Non-Commerce Initiatives

Yao commented that the expected robust growth of Alibaba’s core commerce [estimated net profit CAGR of 21 percent from CY17 to CY19] would provide FCF for investment in the company’s non-commerce initiatives. Many of these initiatives are best-in-class in the China Internet space.

“We expect Cloud and UCWeb, among others, to become meaningful earnings contributors over the medium to long term,” the analyst stated. AliCloud’s growth momentum is expected to continue over the next few years, with improving profitability due to economies of scale. UCWeb would likely generate robust revenue growth and margin expansion.

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