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Alibaba Group Upgraded to Strong Buy on Bright Prospects

Zacks

On Jun 15, Alibaba Group Holding Limited BABA upgraded to a Zacks Rank #1 (Strong Buy).

Reasons Supporting the Upgrade

Alibaba dominates nearly 80% of the Chinese e-Commerce market. Notably, this is the world's fastest growing e-Commerce market. The company has been witnessing top-line growth of over 40% for the past several quarters. Its growth prospect looks bright given extensive efforts towards strengthening international presence through strategic acquisitions and partnerships.

In this year so far, the company has bought stakes in retail companies like Lianhua Supermarket, Lazada and online payment companies like Paytm (One97 Communications). Further, its strategic investments in companies such as Sanjiang Shopping Club Co Ltd. and Ele.me will support top-line growth in our view.


Moreover, Alibaba is expanding presence in other fields as well, notably in the logistics space. Recently, the company announced plans of setting up a logistics centre in Bulgaria for timely delivery of goods in Europe. Moreover, the company is investing in e-sports through its partnership with the International e-Sports Federation and plans to build a number of stadiums in China for e-Sports events.

In February, the company entered into a strategic partnership with Bailian Group to leverage on its big data capacities and to explore new retail opportunities across outlet design, technology research and development, customer relationship management, supply chain management, payment and logistics.

Additionally, Alibaba is investing more into its cloud services. In a bid to expand its reach of cloud platform, the company recently announced to open data centers in India and Indonesia. Apart from this, the recent agreement with Equinix will aid it in offering cloud services via Equinix’s International Business Exchange (IBX) data centers across Sydney, Hong Kong, Silicon Valley and Washington, D.C.

By using Equinix’s Cloud Exchange, the company will be able to expand its footprint in Asia, particularly China, and address rising demand for cloud services in the continent.

We believe that Alibaba’s strong core e-Commerce business, its continued efforts to diversify business especially cloud computing, international expansion plans, and strong financial position will drive long-term growth.

Notably, during its recently held Investor Day in Hangzhou, China, the company provided strong sales growth outlook announcing that revenue growth in 2018 is expected to be in the range of 45– 49%.

Alibaba Group reported decent fourth-quarter fiscal 2017 (ended Mar 31, 2017) revenues of RMB38.58 billion (US$5.61 billion), up 59.5% year over year. Also, revenues were above the Zacks Consensus Estimate of US$5.17 billion.

Moreover, shares of Alibaba returned 75.5% in the last one year, compared with the Zacks Electronic Commerce industry’s gain of 50.8%.

This outperformance can primarily be attributed to the company’s near monopoly in the Chinese e-Commerce retail business, as well as the positive efforts to diversify business beyond it.

In the last reported quarter, revenue from its three emerging non-core business segments, including Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives – increased year over year by 103%, 234% and 88%, respectively.

Estimate Revision

The stock has witnessed upward estimate revisions since last quarterly results. The Zacks Consensus Estimate for the to-be-reported quarter is now pegged at 71 cents representing an increase of 7.6% from 66 cents expected 30 days ago. Similarly, for fiscal 2018, the estimate has risen 13.7% (44 cents) to $3.66.

Other Stocks to Consider

Other top-ranked stocks in this industry include Autobytel Inc. ABTL, JD.com, Inc. JD and MercadoLibre, Inc. MELI. All the three stocks sport a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Autobytel Inc. has delivered an average positive earnings surprise of 41.98% in the trailing four quarters while JD.com, Inc. and MercadoLibre, Inc. (MELI) have delivered positive earnings surprises of 83.49% and 26.74%, respectively over the same time frame.

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