The Cloud Rains Opportunity For Alibaba; Wells Fargo Projects 21% Upside In Shares

Wells Fargo came away from Alibaba Group Holding Ltd BABA's Cloud Computing Conference in Shanghai feeling encouraged about the company's cloud opportunity.

The Analyst

Analyst Ken Sena maintained an Outperform on Alibaba and increased the price target for the shares from $230 to $250. 

The Thesis

The revenue contribution from AliCloud, Alibaba's cloud business, is likely to increase from 5 percent to 10 percent over the next five years, Sena said in a Thursday note. (See the analyst's track record here.) 

Although the analyst expects some margin dilution due to investment in the high-growth Cloud business, he said the drag will diminish over time. The pace of innovation at AliCloud is accelerating, as it has doubled new products and features over the last two years, the analyst said. 

AliCloud's share of the IaaS market has went from from 42.4 percent in the first half of 2016 to 47.6 percent in the first half of 2017, according to Wells Fargo. 

Wells Fargo increased its 2019 AliCoud revenue and EBITA estimates by 9 percent and 34 percent, respectively.

Combined with slightly higher core commerce profitability, the firm now expects 2019 revenues of $63 billion, 2 percent above the consensus, and earnings per share of $6.66 against a consensus estimate of $6.44.

The Price Action

Alibaba shares have added about 20 percent year-to-date.

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Photo courtesy of Alibaba.