Alibaba Group Holding Limited Initiated with Outperform Rating at R. James

Alibaba Group Holding Limited (NYSE:BABA) received an Outperform rating from analysts at Raymond James, who initiated coverage on the stock today. The analysts also gave a $115 price target for the stock.

Reason behind the bullish rating for Alibaba

In a note to investors, Raymond James analyst Aaron Kessler and his colleagues explained that their bullish stock rating for Alibaba Group Holding Limited (NYSE:BABA) was based on the large and fast-growing e-commerce market in China.

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Data from iResearch showed that the online shopping in China was approximately $308 billion last year, and it is expected to reach around $917 billion by 2017, which represents a 31% compound annual growth rate (CAGR).

The analysts also cited the company’s leading e-commerce positioning including mobile, strong network effects, strong management track record, revenue growth and structurally high margins.

In 2013, Alibaba Group Holding Limited recorded $248 billion in gross merchandise value (GMV) making it the largest global e-commerce company. According to iResearch, Alibaba captured 81.5% of the total online shopping GMV in China.

The analyst also explained that their price target for Alibaba Group Holding Limited (NYSE:BABA) was based on 46x CY15E EPS of $2.50, equating to a PEG of ~1.7x. Our 1.7x PEG is generally in line with the peer group, which trades at a 2014 PEG of 1.6x.

Analysts estimated 38% revenue CAGR for Alibaba

Kessler and his fellow analysts estimated that Alibaba Group Holding Limited (NYSE:BABA) will achieve a 38% revenue CAGR (CY13-CY16) driven by several factors including:

  • strong user growth rate (~50% y/y in June quarter)
  • mobile user growth and monetization
  • category expansion across core commerce and digital media
  •  data and cloud technologies
  • expanding cross-border commerce
  •  acquisitions, investments and strategic partnerships

The analysts believed that Alibaba Group Holding Limited (NYSE:BABA) obtains high operating margins through (47.5$ in FY14) through its third-party model.

“While we believe margins have likely peaked near-term as Alibaba invests aggressively in its core and new businesses (i.e. digital content), Alibaba should be able to achieve mid-40s long-term operating margins,” according to Kessler and his fellow analysts.

The analysts estimated that Alibaba Group Holding Limited (NYSE:BABA) will be able to achieve $12.4 billion in revenue and adjusted earnings of $2.04 per share for FY15.

For FY16, Kessler and his colleagues estimated that the company will be able to deliver $17.2 billion in revenue and adjusted earnings of $2.63 per share.