Alibaba has taken a disproportionate hit from investors' concerns over China, MKM Partners' Sanderson argued in a new research note. The stock has declined 37 percent this year, compared with a 12 percent decline in iShares FTSE/Xinhua China 25 Index (NYSEARCA: FXI) and a 17 percent increase in TENCENT HOLDINGS ADR (OTCMKTS: TCEHY).
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Sanderson said that with a "strong underlying story and compelling valuation," MKM recommends "accumulating the stock on weakness." However, Sanderson did warn against "severe currency devaluation." Specifically, as the U.S. nears a new monetary policy tightening cycle, Sanderson said that there is a "growing probability" that China will abandon its quasi-peg to the dollar – particularly if the dollar starts to appreciate. Sanderson invoked prior massive devaluations in Mexico, Thailand and Russia as evidence that "this may get ugly in the intermediate term."
In a new note, Wendy Huang with Macquarie Capital Securities generally agreed with MKM's 12-month price target (which she pegged at $80 instead of $85), but suggested that the stock may see continued pressure to its revenue growth and gross margins. Sanderson's analysis suggested that the gross margin pressure will be modest – while Alibaba can capitalize on the large economic shift from offline to online purchasing.
Despite opening the week lower following a weekend Barron's article, Alibaba has regained ground after a 3.7 percent increase on Tuesday.
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