Alibaba or Tencent: Which stock has the better outlook?

Alibaba Group Holding (HKG: 9988)

Latest share price: HK$271.60 (US$35)

Average 12-month target price: HK$304.28 (US$39)

Estimated upside: 12%

The Alibaba Hong Kong stock has rallied 3.6% in the last one week, as equity markets steadied following a four-day tech correction that saw Alibaba accumulate an 8% erasure of market cap.

The e-commerce giant’s share price received a further boost this week, after Bloomberg reported that the group is currently in talks for a potential US$3 billion investment into Singapore-headquartered lifestyle and ride-hailing app Grab Holdings.

Following the news, Bloomberg Intelligence analysts Vey-Sern Ling and Tiffany Tam wrote that the planned investment could boost the user growth of its Singapore-founded e-commerce subsidiary Lazada, which ‘has been losing ground’ against Tencent-backed Shopee – also based in Singapore.

‘Lazada may tap the sizable ride-hailing and food-delivery user base of Grab, whose services typically have higher usage frequency than e-commerce,’ the analysts wrote.

The stock has a 12-month average target price of HK$304.28 (US$39) a share from 23 analysts polled by Bloomberg, alongside a majority ‘buy’ rating, as of 15 September 2020.

The target price represents a stock return potential of 12% from the last traded price of HK$271.60 (US$35) on 16 September.

Citic Securities analysts reiterated a ‘buy’ call and target price of HK$288 (US$37) on the same day that the Grab deal was reported.

Last month, analysts from Mizuho Securities raised their target prices on Alibaba after the company posted better-than-expected results for the June 2020 quarter.

Mizuho, which recommended a ‘buy’ call, stated that the impact of a potential US ban is low as the country represents less than 2% of the group’s consolidated revenue.

As such, they believe a FY21 revenue guidance of approximately 30% YoY growth ‘is conservative’. They raised their 2023 full-year core EBITA estimate by 2% to 373 billion Chinese yuan (US$55 billion) on potential ‘increased synergies and efficiency’.

On the other hand, Morningstar Research, which has a fair value price estimate of HK$264 (US$34), was more conservative in its thesis.

Sector strategist R.J. Hottoby wrote that he believes Alibaba’s adjusted EBITDA margin will not ‘revert to an upward trend in the next three years, unlike the consensus’ estimates’.

‘We continue to assume slow annual year-over-year adjusted EBITDA margin reduction due to the growing direct retail business and investments in the next three years,’ he said.

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