Why These Alibaba (NYSE: BABA) Stock Price Targets Are Too Low

Last week, Bank of America Merrill Lynch, Brean Capital, and UBS all initiated coverage of Alibaba Group Holding Ltd. (NYSE: BABA) with "Buy" ratings and price targets of $112, $110, and $100, respectively.

And while those BABA stock price targets are bullish, they're all off the mark. Alibaba stock is headed much higher than that.

Admittedly, BABA's first month has been quiet. On Alibaba's first day of trading, shares climbed as high as $99.70, but the stock quickly settled down. In fact, since opening its first day of trading at $92.70, BABA stock has actually dropped 4.8%.

But that isn't a cause for concern. If anything, a drop under 5% in the last month is a good sign. Stocks are typically very volatile following IPOs. New stocks are subject to serious losses if their IPOs take place during a down market.BABA stock price

Take a look at how the markets have fared in the same time span...

Since Sept. 19, the Dow Jones Industrial Average has dipped 5.1%. The Nasdaq and S&P 500 are down 6.1% and 5.4% in that time.

The recent sell-off has also been rough on major tech companies. In the past month, Google Inc. (Nasdaq: GOOGL, GOOG) has dropped 12.2%. Yahoo! Inc. (Nasdaq: YHOO) and Amazon.com Inc. (Nasdaq: AMZN) are down 6.7% and 6.1%.

And BABA's performance is stronger than other recent IPOs. The 32 companies that have gone public since Alibaba have an average gain of just 2.6% from their offer price. If you take out the 89.3% gain of CyberArk Software Ltd. (Nasdaq: CYBR), the 31 remaining companies have averaged a loss of 0.2%.

With a closing price of $88.26 Monday, BABA is still up 29.8% from its offer price. Alibaba stock has also gained 2.8% in the last five trading sessions.

The new analyst price targets represent gains of 27%, 25%, and 13.3% from Monday's close. But investors can expect more profits than that.

In fact, Money Morning's Executive Editor Bill Patalon has found two factors that will drive the BABA stock price for years to come.

"We've made the argument that Alibaba could become the world's first true $1 trillion (market value) company," Patalon said. "And that's just for starters."

BABA Stock Price: Long-Term Bullish Outlook

The Chinese e-commerce market is the first driving force for BABA stock.

In 2013, China became the world's largest e-commerce market. That year, Chinese consumers spent $298 billion. According to the research firm yStats, that was a 60% year-over-year increase. It also surpassed the $263 billion that was spent in the United States last year.

And a recent study by the China Internet Network Information Center (CNNIC) determined the number of Internet users in the country will hit 800 million by 2016 or sooner.

Since 80% of all online transactions in China last year took place over one of Alibaba's websites, it should be the biggest beneficiary of that growth.

But it isn't just the size of the Chinese market that's important. It's also the attitude of the Chinese government...

A Unique Growth Plan

Patalon has had a lot of first-hand experience with Asian economies. He was posted in China and Japan back in 1996 on a special investigative report. He's also spent time in Vietnam working for the country's shortwave-broadcasting service Voice of Vietnam.

And now he sees a major growth opportunity for Alibaba, one that's being spurred by the Chinese government.

"In China's 'E-Commerce 12th Five-Year Plan For 2011-2015' (that's what it's called), the Ministry of Industry and Information Technology focused on making China a true global powerhouse in e-commerce - and I mean a bona fide worldwide leader in this digital transactional realm," Patalon said. "And that plan contains a very interesting element - something I believe is destined to benefit Alibaba in a major way."

"Beijing wants China to be a global leader in e-commerce," Patalon continued. "But it's also trying to shift the overall economy away from its export-driven roots into a market that's driven by domestic consumer spending - more like what we have here in the United States."

"You'll start to see policies that are conducive to consumer spending, and to e-commerce. That's obviously really good for companies like Alibaba, because it means they'll have Beijing's backing."

For Alibaba to hit the $1 trillion market cap that Patalon expects long-term, BABA stock will have to increase more than four-fold. Right now, the company has a market cap of $222 billion.

At $1 trillion, BABA stock would be worth nearly $400 per share. While that's a long-term projection, it makes the recent price targets from Bank of America Merrill Lynch, Brean Capital, and UBS seem very conservative.

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