“At its earnings call in February, BABA announced to ramp up investments in strategic areas including, among others, China ecommerce services (e.g., live broadcasting and community grocery business) and local consumer services,” the 5-star analyst noted. “While management stopped short of providing any guidance, the March quarter results will likely provide some useful color on the scale of its investments which, we believe, are likely to exceed the market’s initial estimates.”
Due to grocery investments, BABA’s peers recently guided down their margin outlook, and therefore Shi does not think the market will be surprised by a potential earnings miss
To gain more of a foothold in this crowded segment, the e-commerce giant recently set up a business unit solely focused on the community grocery business. The unit integrates BABA’s internal resources in the grocery supply chain and sales channels in local markets.
The analyst expects consolidated revenue for the March quarter (4QFY21F) to rise by 58% year-over-year to CNY180 billion, roughly the same as consensus estimates.
On the margin front, Shi anticipates consolidated EBITA to increase by 25% year-over-year to CNY24.8 billion, which is below the Street’s estimate of CNY34 billion. Shi also expects core commerce EBITA to grow 14% from the same period last year to CNY32 billion, also below the Street’s CNY40 billion estimate, with EBITA margins dropping 9pp to 21%.
Finally, given incremental investments in grocery and lower-tier markets, Shi sees EBITA for marketplace-based core commerce increasing by 18% year-over-year to CNY40 billion compared to the Street’s call for CNY44 billion, as EBITA margin declines by 9.5pp to 54%.
All in all, Shi reiterated a Buy rating on BABA shares although the price target gets a slight trim. The figure drops from $329 to $325. Nevertheless, investors still stand to rake in 42% of gains, should the target be met over the next 12 months. (To watch Shi’s track record, click here)
On Wall Street, there’s widespread agreement with Shi’s thesis. Barring one Hold, all 16 other recent reviews rate BABA stock a Buy, culminating in a Strong Buy consensus rating. The average price target currently sits at $322.88, implying upside of ~43% in the year ahead. (See BABA stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.