Alibaba (NYSE:BABA) is one of several options investors can consider when betting on big Chinese internet stocks. Currently, the three major Chinese e-commerce names – BABA, PDD, and JD – are all trading at similar forward PE (price-to-earnings) ratios of around 11x.
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For J.P. Morgan’s Alex Yao, however, it’s clear which one presents a better opportunity right now than the others.
“We think Alibaba is the most attractive one among the three,” the analyst stated, citing two key reasons: “1) a number of high visibility catalysts in the coming quarters 2) a potential narrative change of the domestic ecommerce market positioning, which could lead to a further valuation re-rating.”
That said, investors will need to look beyond the immediate horizon. Yao warns that Alibaba’s upcoming September quarter results may be impacted by a “weak consumption environment,” likely putting pressure on both its top and bottom lines.
The challenging macro backdrop, says Yao, is likely to impact China’s GMV (gross merchandise volume). According to the National Bureau of Statistics, there was a weakening of China online physical goods sales growth in August (+4% year-over-year compared to +8% y/y in July).
Given these factors, Yao projects a 6% year-over-year increase in Alibaba’s quarterly revenue, falling 1% short of consensus estimates. Despite anticipating a 2% drop in non-GAAP EPS compared to last year, Yao’s forecast still surpasses the Street’s expectations by 5%.
In any case, Yao recommends investors look beyond the results and wait for a “few positive drivers” in the coming quarters, such as improvements in overall consumption driven by government stimulus and faster core-core revenue growth following new monetization policies introduced in September. Additionally, Yao anticipates increased active buyer growth due to the integration of Weixin Payment (WeChat Pay), and “continuous Southbound inflow” after the recent inclusion in the HK Stock Connect.
To this end, Yao rates BABA shares an Overweight (i.e. Buy), along with a $125 price target, which implies a ~13% upside from current levels. (To watch Yao’s track record, click here)
Wall Street analysts share Yao’s optimism, with 15 others joining him in rating Alibaba a Buy, while the addition of 3 Holds doesn’t detract from the Strong Buy consensus rating. The average price target of $121.43 suggests potential returns of 9.5% in the coming months, slightly below Yao’s target. (See BABA stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
