3 Catalysts That Make Alibaba A Top Mega-Cap Pick At MKM

Despite an ongoing trade war with the U.S. government, Chinese e-commerce giant Alibaba Group Holding Ltd (NYSE: BABA) remains a top mega-cap stock pick at MKM Partners for three key reasons.

The Analyst

Rob Sanderson maintains a Buy rating on Alibaba's stock with an unchanged $245 price target.

The Thesis

Chinese stocks are likely to correlate with broader macro concerns and the ongoing Sino-American trade spat, Sanderson said in a Friday note. Alibaba boasts three catalysts that supports a bullish case for the stock, the analyst said. 

Moderation In Spending

• Rival streaming video company Iqiyi Inc (NASDAQ: IQ) said its content cost escalation will show signs of moderation in 2019 and it is likely Alibaba's YouKu streaming business will similarly benefit from lower spend.
• Alibaba's investments in its food delivery business Ele.me could result in profitability after a "catch-up" investment spend period ends.
• Management appears to be watching macro conditions and a decision to slowdown new hiring is supportive of margins.

Monetization Initiatives

• The monetization of the "recommendations feed" remains untouched and could be turned on when the macro outlook becomes more certain.
• Search monetization continues to improve aided by algorithms and auction dynamics.
• The company has an untapped high-margin opportunity over time with third-party partners, including Starbucks Corporation (NASDAQ: SBUX).

The Cloud

• Alibaba's cloud is growing 1,300 basis points faster than AWS was at a similar stage in its development.
• Assuming Alibaba Cloud continues to grow at a similar pace versus AWS, it will become a 100-basis point margin tailwind in 2019 and expand to 170 basis points in 2020.

Price Action

Alibaba shares were up 1.51 percent at $158.22 at the time of publication Friday. 

Related Links:

4 Expert Takes On Alibaba's Singles Day Sale

KeyBanc Stays Bullish On Alibaba After 2019 Guidance Cut