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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


November 2nd 2014 Alibaba
Industry: E-Commerce
Price as of 11/31: $98.60

A roll coaster ride in October with the major averages dropping nearly 10% only to roar right back closing up for the month at or near all-time highs. If you blinked, you missed the correction. In the last week of October the Dow Jones Industrial Average rose 585 points or 3.5% to 17,390.52. The Standard & Poor's 500 index rose 54 points, or 2.7%, to 2018, finishing at all-time highs. The Nasdaq Composite index added 147 points or 3.3% to 4630. The Dow rose 2% in October, the S&P 500 rose 2.3% while the Nasdaq rose 3.1%. Seasonally, November through April is the best six months to invest. With a good sized correction behind us, its' time to look for growth stocks for an end of the year rally and New Year bounce. The airlines are acting great thanks to favorable business fundamentals and lower gas prices. Commodities and commodity related stocks remain the weakest sector right now. Oil stocks look cheap with a long term perspective, but in the short term remain very weak. The tech sector has come back to life. Old tech, other than IBM, are acting well. New tech also looks favorable. Facebook took a hit this past week following disappointing earnings, but I doubt the stock stays down for long. Amazon is another disappointing stock following less than spectacular earnings. This week we'll highlight the new E-commerce king coming out of Asia that came public in September. The stock of the week is Alibaba. Alibaba is the premier player in a rapidly growing e-commerce market in China. Founded in 1999 and headquartered in Hangzhou, China, Alibaba is an e-commerce platform comprised of 10 different businesses whose primary purpose is to facilitate trade between buyers and sellers. The company's mission is to make it easy for small and large businesses to do business anywhere by leveraging technology and the Internet. As a result, Alibaba operates primarily as a third party, providing only the platform where consumers, retailers, merchants and wholesalers may meet and conduct business. Alibaba was not your typical IPO. With $270 billion in general merchandise sales through all their distributors, Alibaba conducts more business than Amazon and Ebay combined. With a market cap of $243 billion, Alibaba is already one of the largest market cap companies in the world which will limit the stock's upside, but with great growth prospects of 50% or more sales and earnings growth potential Alibaba may turn into a momentum stock for the year end. Cautious investors may want to wait to see the earnings this week, but if they're good, the stock could take off.
Since Alibaba has only been public for a little more than a month, there are no earnings reports to review. Tuesday morning will be their first quarterly public report. Below is a recent analyst report describing Alibaba. The Pacific Crest Securities analyst said despite significant scale already, he still sees multiple growth opportunities ahead with a $125 price target. Based on Alibaba's strong market position and growth outlook, he believes a target price/earnings multiple of 35 times (less than 1.2 times price/earnings to growth) his estimated calendar 2016 estimated earnings per share of $3.52 is fair, which should propel the stock.
Specifically, he sees potential for Alibaba to drive growth through: 1) increased user adoption of its e-commerce platform; 2) increased activity from existing e-commerce users; and 3) increased monetization of a rapidly growing mobile e-commerce channel.
He sees the largest potential upside drivers for Alibaba coming from international expansion and higher-than-expected take rates, both of which we are modeling conservatively, as well as a financial-services opportunity through Alipay. Alibaba holds a contractual relationship with Alipay, a payment-processing and financial-technology platform that originated as an escrow service for Alibaba transactions.
Alibaba generates most of its revenue from marketing services, generated by performance and display advertising from merchants, as well as from seller transaction commissions and online services fees. Alibaba's China retail marketplaces of Taobao, Tmall and Juhuasuan accounts for around 80% of its total revenue. International and wholesale marketplaces account for the majority of the balance. For fiscal 2014 (ended March), Alibaba's retail marketplaces grew 56% year-over-year and generated GMV of $270 billion, greater than that of ( AMZN ), eBay ( EBAY ), [of China] and Rakuten [of Japan] combined.
Currently, its marketplaces have over 100 million daily users and 280 million active buyers, and the company holds a commanding position in the China consumer e-commerce market with over 80% share by GMV. Altogether, Alibaba's extended network of services and apps touch over 500 million Internet users which, if more effectively leveraged, could imply significant upside to e-commerce user metrics. Given the rapid adoption of smartphones in China, mobile usage has been increasing in importance for Alibaba. For the first half of calendar 2014, mobile as a percentage of GMV increased to 33%. This is up from 15% in 2013 and greater than that of U.S.-based e-commerce peers like Amazon and eBay at about 20% to about 25% of total GMV.
Investors uneasy about the valuation can own the stock through ETFs. Alibaba has made its way into several ETFs over the last couple of weeks. The KraneShares CSI China Internet ETF (NASDAQ: KWEB) is one of several ETFs that concentrate on the niche Chinese Internet sector. It tracks publicly traded, China-based companies whose primary business is Internet-related. The portfolio is comprised of 44 holdings; the top three being Alibaba at 10.6 percent, Tencent Holdings LTD with an 8.9 percent allocation and Baidu Inc coming in at 8.2 percent. KWEB is up 18 percent over the last 12 months and 11 percent over the last six. It has an expense ratio of 0.68 percent.