Alibaba shares could see a 34 percent rally with the company's cloud division driving a "re-rating" of the stock, analysts said, following strong earnings from the Chinese tech titan.
On Thursday, Alibaba reported fiscal first quarter revenue of $7.51 billion, a 56 percent year-on-year rise, helping it to beat market expectations.
Strength in the core e-commerce business as well as continued strength in cloud and digital entertainment and media helped the firm.
Alibaba has been one of the most-loved stocks by Wall Street with shares up more than 86 percent year-to-date. And it seems that analysts don't think this story is over.
A host of brokers raised their price targets for the stock following the results which were substantially higher than the $163.92 it closed at on Thursday. Nomura raised its price target from $170 to $201, Deutsche Bank lifted its one from $201 to $208, while Daiwa Capital Markets expects a handle of $205.
But one of the most bullish brokers was Raymond James who put a $220 price target on Alibaba, representing around 34 percent upside. Analysts say that continued but controlled investment in growth areas will support the stock.
"We expect Alibaba's vast data insight into Chinese shoppers to sustain its current online marketing revenue growth in the coming 1-3 years, while investment in digital entertainment, cloud, and new initiatives should be under control," Daiwa Capital Markets said in a note on Thursday.
"We notice that investor sentiment has improved notably after the recent investor day and thus continue to expect a re-rating of the stock in the coming 12 months ... We see Alibaba as a must-own stock in the China consumer/technology space."
One standout spot in the earnings was Alibaba's cloud division. Revenue from cloud computing increased 96 percent year-over-year in the June quarter to $359 million. The number of paying customers exceeded 1 million for the first time.
Alibaba has been ramping up investment in the cloud, building new data centers, and expanding across the globe.
But cloud still only accounts for around 5 percent of total revenues. This could change analysts said. Amazon is a prime example. Investors are bullish on the U.S. e-commerce giant partly because of the success of Amazon Web Services, its cloud division. A similar effect could be seen with Alibaba in the longer-term, according to one analyst.
Neil Campling, head of technology, media, and telecoms research at Northern Trust Capital Markets, noted that Amazon trades at 65 times its full-year 2019 price to earnings (P/E) for 20 percent revenue growth. P/E is a valuation metric used by analysts.
In contrast, he says that Alibaba trades on 25 times P/E for its fiscal year ending March 2019, for what is likely to be around 40 percent revenue growth. In other words, Alibaba's forward valuation is lower than Amazon's, but revenue is going to grow faster, especially as its cloud business grows.
Campling has a "buy" rating on the stock and says that cloud performance could "drive a re-rating to the Alibaba story in time, much like we feel AWS has for Amazon." He believes Alibaba's valuation will go higher.
"AliCloud is replicating the Amazon blueprint," Campling wrote in a note on Thursday.
"Baba (like…. err, Amazon) keep drip feeding price cuts to entice more business, more partners, higher penetration which then maintains high growth and reinvestment in scaling out solutions. And as this scale occurs so the high original sunk fixed cost enables the companies to add on higher value add services and new solutions ... which ramps profitability."