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Analysts Jockeying Over Alibaba Price Target
by Jamie Dlugosch
It's a big week for social networking stocks.
A number of the biggest names including Facebook (NYSE: FB), Twitter (NASDAQ: TWTR) and LinkedIn (NASDAQ: LNKD) will be releasing operating results for the quarter ending Sept. 30, 2014.
Last week a disappointing result from Yelp (NASDAQ: YELP) crushed shares there.
Yelp wasn't alone. Shares of Amazon.com (NASDAQ: AMZN) imploded after the company released earnings that fell short of expectations.
Such is the risk of owning momentum stocks that are priced mostly on supply-and-demand metrics rather than fundamentals.
Think of it in an auction setting for items most desirable. A momentum stock is that desirable item. Bidders start waging war in an effort to take ownership. The price goes up and up until it settles at a most tenuous range.
Once that equilibrium sets in, Wall Street analysts attempt to make sense of it all, trying to justify the current price or more likely some higher price that then sucks in more buyers thinking the momentum will continue.
But when the desirable becomes undesirable and the buyers race for the exits, the fall can be quite dramatic.
Earnings give investors clues as to the undesirables. If certain metrics are not met or, as was the case with Amazon, a blatant disregard for short-term operating performance is apparent, equilibrium can be lost suddenly.
I expect more of the same when the above-mentioned social networking stocks report results this week. The odds favor some sort of shortcoming or another.
Where will there be few shortcomings? My wager is on Alibaba (NYSE: BABA).
This recent public offering received the obligatory pop after pricing. Wall Street left enough meat on the bone, understanding that there would be plenty of demand to push the stock higher, regardless of the fundamentals.
Now Wall Street is trying to make sense of the story, helping to set equilibrium for Alibaba with just enough upside to keep current holders happy while attracting additional buyers.
Jeffries put out a Buy rating on the stock with a target price of $118 per share using discounted cash flows and assigning a premium to Alibaba relative to its peers.
It's pretty heady stuff and for the most part, it makes sense.
Alibaba is expected to double its base of users in China, so it is easy to see the stock appreciating from current levels.
BMO Capital Markets also rates Alibaba a Buy. Its price target is $110.
Clearly the market and its puppet masters on Wall Street will support a premium valuation for Alibaba. For it to hold, the company will have to deliver the goods.
When Alibaba reports on Nov. 4, it will be its first chance to update investors since the public offering.
The odds of a disappointment are slim and none.
Given how carefully managed the IPO is, it is almost certain that Alibaba will not only beat earnings, but it will likely surprise to the upside.
When that happens, you can bet that buyers will push shares higher closer or even above these Wall Street target prices.
Jamie Dlugosch Editor Investor Research Institute
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