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The best mega-cap technology stock may not be in the US

Key Points
  • MKM Partners considers Alibaba to have the "best fundamentals" of any of the mega-cap tech stocks on Wall Street, raising its 12-month price target on the e-commerce giant.
  • Since Alibaba reported earnings last week, its shares have soared nearly 10 percent.
Alibaba Group Chairman Jack Ma
VCG | Getty Images

MKM Partners raised its return expectations for Alibaba over the next year, declaring that the Chinese e-commerce company has the "best fundamentals of the mega-caps."

"We continue to rank Alibaba our top pick among Internet mega-caps and think the company has the best fundamentals of the group," wrote MKM managing director Rob Sanderson. "We think [raising estimates] is warranted because of +50% organic growth in the segment, strong secular trends, dominant market position and +60% margin."

Sanderson listed several reasons why MKM considers Alibaba's fundamentals the best on the Street, ahead of other industry titans like Amazon and Facebook. The list cited traffic growth, the potential for ad expansion and the adoption and acceleration of e-commerce in Southeast Asia as critical growth drivers.

The analyst bumped his 12-month price target to $220 from $177, representing 26 percent upside from Tuesday's close. The new target embeds a 30 times multiple for the core commerce business and is tied for the highest projection by any analyst according to FactSet.

Alibaba, the favorite tech stock of hedge fund heavy hitters, recently reported better-than-expected earnings. Since the Asian e-commerce giant released earnings last week, its shares have soared nearly 10 percent. The price has almost doubled for 2017.

"We think the stock will extend its gains on a very strong result," said Sanderson. "Consumption growth in China and migration to online is a very long duration growth story and BABA's competitive position is extremely strong in our opinion."

On Alibaba's conference call after the release of earnings on Thursday, Executive Vice Chairman Joseph Tsai discussed the future of Alibaba's "New Retail" initiative, which anticipates changes in consumer behavior.

"The reason we were able to deliver these results is that we sowed the seeds years ago by investing in technology, by investing in innovation, by investing in people and by being bold with a vision that nobody thought was possible," said Tsai.

"Time, place and method of purchase and consumption will be different from what we're used to before. In this new world of consumption expectations, the distinction between online and offline would disappear."