Stifel Adds Alibaba To Select List, Sees 40% Upside Potential

Notwithstanding the recent sell-off in Alibaba Group Holding Ltd BABA, its shares represent an opportunity for long-term investors, according to Stifel. 

The Analyst

Analyst Scott Devitt maintained a Buy rating on Alibaba with a $220 price target for Alibaba shares. Stifel also added Alibaba to its Select List. 

The Thesis

Alibaba shares have declined about 12 percent since it reported fiscal fourth-quarter results, dragged by trade war concerns, an Altaba Inc AABA sell event and concerns over investment in growth, Devitt said in a Thursday note. (See his track record here.) 

This is despite Alibaba reporting solid results, with customer management and commission revenue accelerating due to incremental monetization and accelerating physical goods transaction growth, the analyst said. 

The e-commerce platform's slightly below-consensus 2020 guidance is "appropriately conservative" given the uncertain macro backdrop, Devitt said, adding that he sees scope for outperformance.

Alibaba's level of EBITDA margin compression should ease in 2020, the analyst said. 

Cross-border business between the U.S. and China accounts for a smaller component of Alibaba's revenues, Devitt said. Long-term secular trends such as a growing middle class and the economy shifting toward services favor the company's long-term growth trajectory, he said. 

"Overall, we continue to like Alibaba as a leading global eCommerce company that holds a dominant market share in China online shopping and operates an efficient, commission / advertising model in its core marketplace businesses, Tmall and Taobao." 

The firm sees the recent pullback as creating an opportunity to own shares with a long-term investment horizon.

Kinahan: 'You're Buying Risk' 

JJ Kinahan, chief market strategist at TD Ameritrade, told Benzinga that investors should exercise caution with Chinese internet stocks. 

"You know what you're buying; you're buying risk. if you go into these names, you're going to have to have more risk tolerance to the downside," Kinahan said. 

"It's just like buying companies during litigation. There is an extra element of risk and you have to take that into account."

The Price Action

Alibaba shares were down 0.64 percent at $155 at the time of publication Friday. 

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Photo courtesy of Alibaba.