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Alibaba’s shares have almost doubled in the past seven months. With its success in its core e-commerce business priced in, the China tech giant will need to extend its success to less proven areas.Shares of the New York-listed firm have gained 75% since...

Alibaba Needs to Prove it Can Reach Great Heights

Alibaba’s shares have almost doubled in the past seven months. With its success in its core e-commerce business priced in, the China tech giant will need to extend its success to less proven areas.Shares of the New York-listed firm have gained 75% since...

Alibaba Needs to Prove it Can Reach Great Heights

Alibaba’s shares have almost doubled in the past seven months. With its success in its core e-commerce business priced in, the China tech giant will need to extend its success to less proven areas.

Shares of the New York-listed firm have gained 75% since February, when the stock was trading below its initial public offering price. Results of a blowout quarter announced in August has further fueled the rally, with the stock now boasting a market value of $264 billion, close to its post-IPO high.

Analysts who follow the stock are fully pricing in the company’s main e-commerce businesses in the share price. Based on the average of nine analysts’ sum-of-the-parts approach to valuation, its e-commerce business is worth $99.20 a share, or 6% less than its current share price. That is already 30 times this fiscal year’s expected adjusted earnings—pricing in significant future growth.

That leaves investors to look for upside in Alibaba’s other businesses. Two big bets stand out—Ant Financial, which owns China’s biggest online payment platform, and Aliyun, its cloud computing service.

For Ant Financial, an easy way to peg its value is to the $60 billion valuation it got from its latest funding round in April. Alibaba is entitled to 37.5% of Ant’s pretax income, but is allowed to exchange that for a 33% stake when Ant goes public, conditional on regulatory approval. That $60 billion valuation, however, comes at a heady valuation. Ant’s enterprise value is 22 times next year’s earnings before interest, taxes, depreciation and amortization, according to Deutsche Bank DB 14.02 % ’s estimates.

For the cloud business, analysts who cover Alibaba give out diverse estimates with an average of around $22 billion. Goldman Sachs, GS 1.46 % for example, estimates the business at $42 billion. That’s eight times expected revenue in the fiscal year ending March 2019, assuming revenue grows nearly 10 times between last fiscal year and then.

The segment only generated $187 million in revenue for the quarter ended June. Hopes may run high given the easy analogy with Amazon’s success in cloud. Yet the business is still unprofitable and it could face serious competition from Alibaba’s rivals Baidu and Tencent, which have ramped up their investments in cloud.

While these investments may eventually perform well for Alibaba, the company’s share price simply assumes they will.

Write to Jacky Wong at JACKY.WONG@wsj.com

Our editors found this article on this site using Google and regenerated it for our readers.

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