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Why the Alibaba share price stands to gain from COVID-19

Here’s why two analysts have gone against the grain to predict revenue growth for Chinese e-commerce giant Alibaba.

Source: Bloomberg

Why is the coronavirus an ‘opportunity’ for Alibaba?

As COVID-19 continues to rear its ugly head, internet companies like Alibaba Group Holding Limited and Tencent have found themselves on the ‘good’ side of things, if there’s such a thing.

That’s according to IG Asia analyst Reo Liao, who wrote that the ‘coronavirus will be an adversity, but also an opportunity for Alibaba’.

‘Because of the need to isolate human contact, Alibaba has observed noticeable increment in average basket size under its two fresh food brands, Freshippo and Taoxianda, during the coronavirus outbreak period,’ Liao wrote in a client note on Monday 17 February.

‘Alibaba believed that it was due to consumers’ migration to online purchasing of fresh goods and daily necessities that resulted in a significant increase in grocery online shopping,’ he added.

Hong Kong-based Morningstar equity analyst Chelsey Tam also shared a similar sentiment in a research paper sent out earlier this week. She wrote that the main long-term beneficiaries of the coronavirus outbreak are likely to be ‘Chinese internet firms with online products and services that are not yet well penetrated, as they could see an increase in users’.

E-commerce, online video, and cloud computing to see revenue growth

Such firms include e-commerce platforms and digital services like Alibaba, which she noted are not yet widely used in lower-tier cities and rural areas. Like Liao, she theorised that the virus outbreak would actually result in faster and higher adoption rates in the long run, with more people now staying at home.

The three areas that she singled out for positive impact during what has been a tumultuous period for many businesses are: e-commerce, cloud computing, and online video.

E-commerce, Tam noted, could see a 64% upside to revenue, on the basis that there would be a positive spike in demand for online shopping, especially for groceries, as more people stay away from public places.

Cloud computing could potentially experience an 8% increase in revenue, thanks to growing demand for online office and telecommuting tools such as Ding Talk.

A 6% revenue boost is expected for online video streaming services, on the back of more app subscriptions during this health crisis period that has forced more folks to stay home.

Interestingly, she expects Alibaba's food delivery unit’s revenue to be negatively impacted, as it was reported that there were some food delivery personnel who were diagnosed with the coronavirus. Consequently, some regions such as Henan ZhuMaZhan city ordered food delivery services to completely halt their operations, while some cities in Henan and Shandong enforced a shutdown of all discretionary public areas, including restaurants.

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A profitable December 2019 quarter

Both analysts' boldly optimistic take on things are separate from the fact that Alibaba recently reported a highly profitable quarter for the three months ended 31 December 2019.

For the final quarter of FY2019, the group achieved gross revenues of RMB161.5 billion (US$23.2 billion), an increase of 38% year-over-year. Annual active consumers in its China retail marketplaces reached 711 million, an increase of 18 million from the 12-month period ended 30 September 2019.

Additionally, net income attributable to ordinary shareholders came in RMB52.3 billion (US$7.5 billion), and net income was RMB50.1 billion (US$7.2 billion). Non-GAAP (Unadjusted) net income was RMB46.5 billion (US$6.7 billion), an increase of 56% year-over-year.

Group CEO Daniel Zhang attributed much of this profitability to the highly-touted ‘Alibaba Digital Economy’ business strategy, for helping to expand the company’s network reach not just in China, but also globally.

Its Cainiao Network, for example, continues to ramp up focus on improving domestic and international one-stop-shop logistics services and supply chain management solutions in a bid 'to serve Alibaba Digital Economy’s consumers and merchants'. Thanks to this keen focus on digital customers, Cainiao Network’s revenue grew 67% year-over-year to RMB7.5 billion (US$1.08 billion) in this latest quarter.

Another impressive result of this digital-centric strategy is the addition of 39 million mobile monthly active users for Alibaba’s China retail marketplaces to 824 million between September 2019 and December 2019.

IG analyst: share price target of US$250

Following the earnings report, Alibaba’s American Depository Share price had rallied over 2%.

On the back of this, IG’s Liao has given a price target of US$250 for the coming months, with a possible entry mark of US$205 per share.

He cited Alibaba’s fast-expanding China network into lower-tier cities in the December 2019 quarter, and growing demand for online grocery shopping during the virus outbreak period, as the two main reasons for his price prediction.

‘It is particularly worth noting that over 60% of the increment of active customers came from China’s less developed areas. By encouraging more brands to penetrate into low tier cities in China, Alibaba’s gross merchandise volume in 11.11 Global shopping festival reached a new record of RMB 268 billion,’ he wrote.

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