Alibaba has earned several estimate cuts from around Wall Street, with Morgan Stanley being one of the latest firms to do so. However, the firm’s analysts also see some positives which they think most investors are failing to see. It is because of these positives that they raised their price target for Alibaba slightly from $109 to $111.90 per share.
Why Alibaba’s estimates are being cut
Alibaba management recently made some cautious comments related to the elimination of lottery sales on the company’s online properties. The company is also facing the possibility of higher traffic acquisition costs and investments and also reductions in JHS commissions. For this reason, Morgan Stanley analyst Robert Lin and his team trimmed their earnings estimates by 5% to 7% for the 2016 through 2018 fiscal years.
However, they don’t think Wall Street is factoring in the increase in ads on Alibaba’s mobile apps. They think this positive trend could offset the negatives from the elimination of lottery and falling JHS commissions. Further, after analyzing Alibaba’s search targeting, they see “ample upside” to the e-commerce giant’s monetization rate. They believe mobile monetization will surpass that of desktop by the 2017 fiscal year.
They also expect strong growth in gross merchandise volume in the near term because of Alibaba’s mid-year promotional event. They say Timal should especially benefit. The Morgan Stanley team thinks Alibaba is on track to hit its goal of $500 billion in gross merchandise volume by 2016 and $1 trillion by 2020. These numbers suggest a compound annual growth rate of 20%.
Alibaba’s three other businesses
The analysts also say that Alibaba is “sparkling of hidden value in another three large businesses.” For one, they say mobile monetization should result in an “abundance of virtual real estate” like screen views. They note that business models that monetize without proof that traffic is converting to sales are not as valuable as models that do offer proof.
They suggest that Alibaba could share and leverage the data of its users, which is of very high quality, to improve targeting. The Morgan Stanley team also points out that Alibaba has a very transparent strategy for growth in investing in and partnering with businesses which can generate “data from all facets of the consumer journey.”
Alibaba invests heavily in businesses
For example, Alibaba has a large investment in China’s top Cloud platform. The online retailer also is “incubating” one of the biggest networks for mobile ads, which has resulted in higher traffic acquisition costs in the near term but should more than make up for that over time.
Alibaba has also been heavily investing in entertainment and media assets while also investing further in its vertical partners. Within the next three to five years, the Morgan Stanley team expects to see more value for Alibaba being formed in Cloud, mobile ad networks and digital entertainment.
As of this writing, shares of Alibaba were down 0.08% at $85.68 per share.
