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

Jayson Derrick

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. 

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KeyBanc Stays Bullish On Alibaba After 2019 Guidance Cut

Latest Ratings for BABA

Date Firm Action From To
Dec 2018 Mizuho Assumes Buy
Nov 2018 MKM Partners Maintains Buy Buy
Nov 2018 UBS Maintains Buy Buy

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