Alibaba shares could nearly double IPO price in a year: MKM


A second-day selloff in Alibaba shares didn’t worry analysts at MKM Partners, who believe there are a number of investment positives that could lead to a near doubling of the company’s share price during the next year.

The Chinese ecommerce giant’s shares BABA, -4.26%  slumped 4.5% in midday trading Monday, but were still 32% above the initial public offering price of $68. On Friday, the stock’s first day of trading, it closed at $93.89, or 38% above the IPO price.

MKM analyst Rob Sanderson initiated research coverage of Alibaba with a buy rating, and a 12-month price target of $125, saying the company is a “powerhouse” in what is currently the best secular growth market for Internet retailing. “We see [Alibaba shares] has a core holding for growth managers,” Sanderson said.

The investment positives include:

  • China’s ecommerce economy is booming. “For an emerging economy, China has strong broad band and wireless infrastructure with weak brick-and-mortar retail infrastructure,” Sanderson wrote in a note to clients.
  • Alibaba holds a dominant market position. Although there are many fast-growing competitors, Alibaba has maintained 50% to 90% market share in the retail categories it serves, and conducts about 70% of the overall ecommerce business in China.
  • Despite the enormous scale, market penetration remains low. The number of active buyers, at 279 million, is still growing, driven by the mobile business. And Sanderson pointed out that there were 1.3 billion wireless subscribers in China.
  • Alibaba’s business model is highly profitable. “The company takes no inventory risk, and does not bear the burden of building fulfillment capabilities,” Sanderson said. Operating margin was 43% in June, a multi-quarter low, and has been as high as 51%. In comparison, Amazon said second-quarter operating profit margin was a negative 0.1%, compared with a positive 0.7% in the first quarter.

Meanwhile, some potential concerns Sanderson pointed out include the fact that the move to mobile could hurt revenue growth in the near term, and anything that raises any questions about management credibility, given the complex ownership structure.

Before Alibaba’s shares began trading on Friday, Cantor Fitzgerald initiated them with a buy rating and $90 price target, while Wedbush Securities started covering them earlier this month with an outperform rating and $80 target.



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