Alibaba Group Holding Ltd (NYSE:BABA) is seriously a cut above the rest in the retail sector. U.S. retailers struggle this year due to economic uncertainty surrounding President Donald Trump’s ability to advance his economic agenda. But Alibaba has flourished in a red-hot Chinese e-commerce market, making BABA stock a clear choice for your portfolio.
For proof, you need look no further than Alibaba’s recent quarterly earnings report. The company said that fiscal first quarter profits rose 94% to $2.2 billion on e-commerce sales that jumped 56% year over year.
What’s more, Alibaba has seen net income climb nearly 40% year-over-year, on average, since 2013. Additionally, gross revenue has surged nearly 69%, on average, in that time.
As bullish as they are on BABA stock, however, Wall Street analysts aren’t bullish enough. This past week, MKM Partners lifted its price target on BABA stock to $220 on the belief that the brokerage community isn’t pricing in 2018 growth accurately.
That’s a more-than-fair statement. For one, the Chinese e-commerce market is expected to grow roughly 50% through fiscal 2018, from $1 trillion in sales this year to $1.5 trillion in sales in 2018. Alibaba is the current market leader in e-commerce sales in China, and with Alibaba-backed Ele.me acquiring Waimai — Baidu Inc (ADR)’s (NASDAQ:BIDU) food delivery unit — this week, its position is sure to solidify.
And those are just Alibaba’s opportunities in China.
The company is continually wending its way into the U.S. market to exploit Chinese consumers’ desires for American products. Alibaba’s small business and entrepreneur symposium in Detroit back in March was just a peak at how the company is slowly, but surely, gaining access to the world’s largest economy.
Click to Enlarge Once it does, Alibaba’s 90% gain so far this year could be just the tip of the rally. In fact, even MKM Partners’ $220 target could be conservative. As I recently noted over at Banyan Hill, shares will hit $250 next year.
After coming off such a sudden growth spurt, however, BABA stock is sure to see some consolidation in the next couple of weeks. Bulls who got in ahead of earnings — like those that saw returns of up to $108% from last month’s Aug $150/$155 bull call spread — are now taking profits.
What’s more, Alibaba stock is trading deep in overbought territory as it deals with resistance in the $175-$180 region. This situation is sure to create some short-term drag on BABA, potentially sending the shares down for a test of support in the $165-$170 region in the next month.
Traders have two ways to take advantage of this situation.
2 Trades for BABA Stock
Put Sell: For those traders looking to own Alibaba, and take advantage of a potential 40% run-up in the shares next year, selling put options can provide you with an excellent entry point for this red-hot stock.
As I’ve noted before, selling put options can be used for more than just collecting premium on stagnant stocks. They also can be used to essentially name your own price for the underlying shares — and get paid to do so.
Right now, a pullback to or below $170 would represent a buying opportunity. Setting $170 as your target buy price, you could sell a Sep $170 put for $2.25, or $225 per contract and wait for the shares to pull back.
If BABA stock doesn’t trade below $1700 by the time September options expire, you keep the premium and roll your target out to the next contract month and try again. The downside is that it’s possible that Alibaba will never trade below $170, leaving you sans the shares, but still banking the premium for selling the options.
Put Spread: If you’re more interested in capitalizing on the pullback instead of owning the shares, a Sep $170/$175 bear put spread has the potential to do just that.
At last check, this spread was offered at $1.75, or $175 per pair contracts. Breakeven lies at $173.25, while a maximum profit of $3.25, or $325 per pair of contracts — an 85% return — is possible if BABA stock closes at or below $170 when September options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
