Alibaba has been on a tear over the last couple of days, climbing from around $87 per share up over $94 per share. On Thursday, the stock was helped by an initiation report from Bernstein analysts, who set a “high-conviction” Outperform rating and $120 per share price target on it.
Among the points in their report was how some investors compare Alibaba with eBay, although they disagree with that. Instead, I would argue that the company’s new CEO selection indicates that the focus on the cloud suggests that Amazon would make a better comparison.
Alibaba to see growth in mobile
In their report, analyst Carlos Kirjner and his team said they think Wall Street may be underestimating Alibaba’s Taobao and Tmall online properties. Specifically, he thinks investors may not be fully appreciating the potential for growth in gross merchandise volume offered by the two marketplaces.
They point out that e-commerce in China is growing rapidly, which in turn is quickly increasing Alibaba’s addressable market in the world’s biggest market. The rising income of the average Chinese consumer is also driving further growth in the company’s addressable market, as are increases in consumption and penetration rates for internet.
Gross merchandise volume growth projected
The Bernstein team also noted that Alibaba held about 80% of China’s e-commerce gross merchandise volume “flow share” as of last year and has plenty of room to grow even though smaller competitors like JD.com have clocked greater rates of growth recently.
They’re projecting at least a 22% compound annual growth rate in gross merchandise volume for Tmall and Taobao between last year and 2018. That would put Alibaba’s gross merchandise volume at RMB5 trillion. They expect mobile purchases will make up more than three-quarters of the company’s gross merchandise volume by the end of next year and a staggering 90% by the end of 2018.
Alibaba’s revenue to grow faster than GMV
Further, the Bernstein team said they’re expecting to see revenues increase much faster than gross merchandise volume during the 2017 fiscal year due to the significant growth in mobile purchases. In fact, Kirjner and team think the Chinese e-commerce giant “has barely scratched the surface” in mobile monetization of gross merchandise volume. They think mobile monetization could even surpass that of PCs within the next one to two years.
Interestingly, they compare Alibaba’s shift from web to mobile to Facebook’s “shift from right hand rail-only ads to Newsfeed ads.” They point out that the click-through rate of the Newsfeed ads is at or above that of the right hand rail-only ads. However, they say one difference is that improvements in mobile search ad units in a fashion similar to what Google has done could improve click-through rates even more.
Alibaba, JD compared to eBay, Amazon
Apparently some investors are comparing Alibaba with eBay and JD.com with Amazon (which is interesting because I’ve heard many comparisons between Alibaba and Amazon). The Bernstein team doesn’t think there’s anything to these comparisons, however, despite the similarities in strategies.
JD is compared to Amazon because it runs both a third-party and first-party marketplace and because it has been investing heavily in fulfillment and logistics. Alibaba has been compared with eBay because it has just a third-party marketplace and chooses to partner with fulfillment and logistics companies rather than build out its own infrastructure. The concern is that JD.com will have a bright future like Amazon while Alibaba will eventually fall behind like eBay has.
Amazon makes a better comparison for Alibaba
However, the analysts believe that the way Alibaba is doing business right now makes the most sense for its model and is more likely to support its logistics needs in the future. Also Alibaba’s scale makes it better positioned than competitors like JD.com if it does end up changing strategies.
Indeed, Alibaba’s scale along is often used by Wall Street to compare it with Amazon rather than eBay. Also like Amazon, Alibaba has been investing in cloud infrastructure and areas other than just e-commerce, unlike competitor JD.com.
Alibaba appoints new CEO
Alibaba’s recent appointment of a new CEO is also interesting in light of its investments in the cloud. Founder Jack Ma is being replaced by Daniel Zhang, and Morgan Stanley analyst Robert Lin and his team note that much of Ma’s speech in announcing Zhang’s appointment focused on the cloud.
Zhang is apparently very focusing on improving their AliCloud service with the goal of adding value to Alibaba’s customers. The executive apparently sees their cloud investments as being just as important as or perhaps even more so than that of the core e-commerce business or Ant Financial Services.
As of this writing, shares of Alibaba were up 0.05% at $93.93 per share.
