Why Alibaba Is This Top Analyst’s Favorite Mega-Cap

Chinese tech companies have come under intense pressure recently. The TikTok saga has only amplified what was already a fraught relationship between the U.S. and China, as the trade war rumbles on in the background.

However, Truist analyst Youssef Squali tells investors to ignore the noise and snap up shares of Alibaba (BABA), as according to the 5-star analyst the Chinese e-commerce giant has “large opportunities ahead still both inside and outside China.”

Squali’s endorsement comes after attending 3 days of presentations by the company’s leadership as part of Alibaba’s 5th Annual (Virtual) Investor Day.

Squali cites several reasons why he considers BABA his “favorite mega cap.”

First off, despite already claiming 80% of the Chinese e-commerce market, over the next 3 years, Squali expects BABA to grow the top line at an average of roughly 28% per year.

“This puts it as the fastest top line grower among our covered mega caps (growing faster than Amazon, Alphabet and Facebook!), benefiting from low penetration in consumer demand in lower tier cities where 55% of the population has yet to buy anything online, and where the company is showing strong traction,” the analyst said.

In further comparison to other mega-caps, Alibaba boasts one of the highest profit margins among the group, with the core commerce business – which makes up 85% of revenues – exhibiting a very robust profit margin (EBITDA) of 38%. And while the company is intent on aggressively pursuing further growth and investment opportunities, Squali estimates “BABA will support EBITDA and EBITA margins of 31.7% and 28.1% in FY21 respectively, which we believe should improve over time.”

Moreover, there’s another big catalyst on the horizon. Ant Group – an affiliate company of Alibaba – will go public soon in what is expected to be one of the largest IPOs ever. The owner of China’s popular Alipay mobile wallet boasts over 1.2 billion monthly active users and was valued at $150 billion in its latest VC round. Yet its valuation could rise to $250 billion by the time it is listed.

A recent shrewd move by Alibaba will see it benefit immensely once Ant hits the market.

“We note that last year, Alibaba converted its profit sharing interest in Ant into a 33% direct equity ownership,” Squali said. “A $250B IPO valuation would be a windfall for Alibaba Group and its SOP valuation as it would imply a minority stake value of ~$83B versus the ~$50B we’ve been carrying it at in our SOP.”

So, that’s all great for Alibaba but what does it mean for investors? Squali reiterated a Buy rating on BABA shares and bumped the price target from $285 to $308. However, this figure implies a modest upside of just 5% from current levels. (To watch Squali’s track record, click here)

Overall, Alibaba has Wall Street’s full support. All 23 current reviews rate the stock a Buy, adding up to a Strong Buy consensus rating. The $316.25 average price target is almost identical to Squali’s, and suggests upside of 7.5% (See Alibaba stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.