Alibaba Group (BABA.US) shares closed significantly higher on Tuesday, rising 4.14%, markedly outperforming the S&P 500 index’s 0.3% gain. The surge was primarily fueled by a major analyst price target increase.
Ahead of the market open, Barclays analyst Jiong Shao raised his fair value assessment for Alibaba’s American depositary receipts (ADRs) from $145 to $190, maintaining an “overweight” (equivalent to a “buy”) rating. This represents a substantial 31% boost.
Shao’s optimism is largely based on Alibaba’s robust cloud computing division. Despite the company missing consensus estimates for both revenue and profitability in its recently reported second quarter, investors found positives in the cloud unit’s performance and encouraging growth in e-commerce. The analyst highlighted that revenue for the cloud business grew by 26% year-over-year in the latest quarter. He firmly believes this business has further growth potential and that management can maintain its profit margins.
Following the earnings report, Shao was among several analysts who raised their price targets for Alibaba. Arete analyst Zixiao Yang upgraded his rating on the stock from Neutral to Buy, setting a price target of $152 per ADR.
Alibaba currently trades at less than 18 times forward earnings, presenting a more attractive valuation compared to some U.S. tech and AI giants. This valuation gap partly reflects the unique risks associated with the Chinese market, including a less predictable regulatory environment and significant economic challenges in recent years.
However, for investors comfortable with these risks after conducting due diligence, Alibaba offers exposure to a large-scale tech and AI company in a massive market, and at a more favorable valuation than comparable U.S.-based peers.
