Alibaba Group Holding Ltd. (NYSE:BABA) has been steadily declining since November, with shares down about 30% from highs of around $120 for shares of BABA stock.
But investors still clinging to Alibaba in hopes of a rebound could be sorely disappointed, and investors should sell BABA stock ASAP before current declines get even worse.
One major cause of concern lately came via disappointing earnings from the Chinese Internet giant in January. BABA stock lost about 10% in a single session as revenue missed by a mile; in the all-important December quarter that included Single’s Day, Alibaba reported 40% revenue growth to $4.22 billion, well short of the $4.45 billion forecast.
And now, you’ve got the glut of about 430 million shares — or nearly 18% of the company — that could start flooding the market today now that the first lockup expiration has ended.
Of course, there are no guarantees that insiders will dump their shares of BABA stock en masse. There’s also a feeling that, after recent declines, some of the dilution caused by this lockup expiration has already been priced in.
But keep in mind that this is only the prelude to a larger lockup that expires in September … where Alibaba will unshackle 1.58 billion ordinary shares — almost four times the amount hitting the market this spring!
You do not want to be left holding the bag if sellers take these opportunities to unload.
BABA Stock Is a Sell
From a valuation perspective, Alibaba stock isn’t completely outrageous based on its profits; BABA stock trades for a forward price-to-earnings ratio of about 29, which isn’t that much higher than the P/E of roughly 19 for the Nasdaq-100.
But when it comes to price-to-sales ratios, BABA is off the chart.
To make matters worse, Alibaba isn’t just overvalued in and of itself, but it is engaging in the continued inflation of a new tech bubble by throwing $200 million at hyped-up messaging app Snapchat recently. How this company, with almost no revenue and no e-commerce ties, can help BABA stock succeed is simply beyond me.
With momentum remains firmly to the downside, disappointing earnings a few months back and a price-to-sales ratio that is unsustainable, investors in BABA stock should take note of the warning signs.
While the Alibaba IPO was indeed a historic event, that doesn’t mean the company is still a good buy at current levels — or that you should hang on in the hopes of a rebound.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
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