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The Future Just Looks Better and Better for Alibaba Stock

Chris Lau

Much of the direction that Alibaba (NYSE: BABA) stock takes depends on the trade talk progress between the U.S. and China. So when the two countries agreed on a temporary truce that would prevent further new tariffs, Alibaba stock bounced.

The Future Just Looks Better and Better for Alibaba Stock

Source: Shutterstock

The stock bottomed at $150 at the start of June but just recently broke above some 50-day and 200-day technical resistance at around $165.

Though the earnings report is still nearly a month away (set for Aug. 14 before the market opens), what are the near-term positive catalysts?

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Higher Liquidity in Alibaba Stock

The Altaba (NASDAQ: AABA) shareholder approval of complete liquidation on June 27 will increase the stock liquidity. Take the Vivendi scenario as a case study to predict what happens next with BABA stock.

Vivendi, once a major shareholder in Activision (NASDAQ: ATVI), sold an $8.3 billion stake in 2013 and then the rest of its stake for $1.1 billion in 2016. This lifted a major overhang for Activision and helped lift the stock. It just happened that the demand for gaming grew steadily in those years, but the improved share liquidity cannot be ignored. When a major stockholder liquidates its Alibaba stock, expect trading to increase.

Altaba shareholders might want to switch to BABA stock ahead of the liquidation. Altaba trades at a discount to the value of Alibaba stock because the market is already discounting the massive capital gains tax the holding company will face. Conversely, investing in Alibaba is attractive even at current levels. At a 20 times forward P/E, the other valuation multiples will fall when the company reports quarterly earnings that easily beat market consensus estimates.

On July 15, Alibaba proposed splitting its shares one-to-eight. The lower price per share will attract investors who previously would prefer not to hold a $173.50 share. They would prefer holding eight shares at $21.69.

Strong Growth Expected

In the fiscal fourth quarter, Alibaba reported earnings of $1.25 a share as revenue grew 39.6% to $13.6 billion. The company grew strongly after taking a number of initiatives. It attacked counterfeiting by forming the Alibaba Anti-Counterfeiting Alliance in 2017.

The group now has 132 global brand companies stemming from 16 countries in 12 diverse industries. Despite criticisms of Intellectual Property (IP) theft and copying in China, China took steps to protect against IP infringement in recent years. Alibaba aligned its corporate values to that of China’s by protecting IP.

Alibaba targeted its business so its products resonate with China’s middle class. China now has a middle-class population of 300 million. Domestic consumption is $5.5 trillion today. But looking ahead, demand from the lower-tier (third, fourth, and fifth-tier) cities will triple from $2.3 trillion to almost $7 trillion in the next decade.

Operationally, Alibaba has scale and effectiveness that competitors cannot match. For example, its Tmall cross-border commerce platform widens its addressable market. Even while benefiting from domestic growth, it stands to grow its market giving overseas brands and merchants a way of selling to Chinese consumers virtually.

Alibaba’s Partnerships with Big Brands

Alibaba partnered with Starbucks (NASDAQ: SBUX) to establish a strong brand presence in China. It did this through Alibaba’s mobile-ready China retail marketplace. This allows Starbucks to expand its physical presence while building achieving customer engagement and acquisition through its mobile app.

In the last fiscal year, Tmall’s use of proprietary insight technology and marketing tools helped merchants grow their customer base. Over 1,200 brands each acquired an incredible 1 million new customers on its platform. And in the fourth quarter, customer management revenue grew 31% from last year.

A bigger user base combined with better conversion rates, plus trendy new brands led to higher fees collected. Instead of aiming to monetize recommendation fees further, Alibaba will re-invest the earnings to grab more of the market. It is determined to win customers from cities that are Tier 3 and below.

Valuation and Your Takeaway

Alibaba exhibited strong commission and customer management commerce revenue growth. If the pace of growth matches that achieved in Q3/2019, Alibaba stock will trade higher.

Alibaba Stock

Source:  BusinessQuant

Analysts have a price target that is 27% above the recent $173.50 closing price (per tipranks). At ~$221, the analyst valuation may prove too optimistic. Conservative investors may assume a perpetuity growth rate of ~4.0% instead. Per finbox.io, that implies the stock’s fair value using a 5-year DCF Growth Exit model is just below $210 a share.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

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