Alibaba Earnings Preview: 2 Trades for BABA Stock

Alibaba (BABA) is slated to slip into the earnings confessional ahead of the open this Wednesday. BABA stock has faced a rocky road this year, with the shares riding a rough road due to turmoil in Chinese markets and crackdowns by Chinese regulating bodies on counterfeit online sales. By and large, Wall Street analysts believe that BABA will remain unfazed … but should you follow their lead?

Alibaba Earnings Preview: 2 Trades for BABA StockDigging into the numbers, Alibaba earnings are expected to come in at 58 cents per share, up roughly 40% year-over-year. First-quarter revenue, meanwhile, is expected to rise 33.6% to $3.4 billion. Alibaba has had trouble meeting these forecasts in the past year, missing Wall Street’s targets in each of the past three reporting periods.

It is somewhat surprising, then, that reports that some analysts have set their sights considerably higher than the consensus. In fact, the first-quarter whisper number for Alibaba earnings comes in at 63 cents per share.

While it may not jive with Alibaba’s prior earnings performance, this bullish sentiment falls right in line with ratings data from Thomson/First Call. Specifically, 41 of the 45 analysts currently following BABA stock rate it a “buy” or better.

By comparison, only four analysts rate the stock a “hold,” while none have doled out “sell” ratings. Additionally, the 12-month price target of $105 represents a sizable 33% premium to Friday’s close.

That said, BABA options traders are no where near as bullish as the brokerage community. Currently, the August put/call open interest ratio comes in at 0.89, with calls nearly in parity with puts among near-term options. This ratio rises to 0.93 when we zero in on just the weekly Aug 14 series — i.e. those options most affected by this week’s earnings report.

BABA 08-10-2015
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Overall, weekly Aug 14 series implieds are pricing in a potential post-earnings move of about 6.75%. This places the upper bound at $84.33, while the lower bound lies at $73.67. A post-earnings rally would put BABA stock in contention with overhead resistance at its 50-day moving average (where a breakout would be bullish for the stock), while a decline would leave BABA near annual-low territory.

2 Trades for BABA Stock

Call Spread: Despite recent technical trouble for BABA stock, Alibaba has plenty of room to grow in a massive Chinese market. Baring any major hiccups, this week’s earnings report should reassure investors of the company’s long-term growth potential, helping to solidify a bottom for the shares and send BABA higher as a result. As such, traders looking to jump on the bullish bandwagon might want to consider an Aug $80/$83 bull call spread.

At last check, this spread was offered at $1.05 cents, or $105 per pair of contracts. Breakeven lies at $81.05, while a maximum profit of $1.95, or $195 per pair of contracts, is possible if BABA stock closes at or above $83 when August options expire.

Puts Spread: On the other hand, there are some short-term risks facing BABA stock, not the least of which is the recent bearish cross of its 10- and 20-day trendlines. Additionally, if Chinese policy begins to affect or cloud Alibaba’s guidance, it could spell trouble for BABA stock.

Those looking to bet against BABA ahead of earnings might want to consider an Aug $75/$77 bear put spread. At last check, this spread was offered at 54 cents, or $54 per pair of contracts. Breakeven lies at $76.46, while a maximum profit of $1.46, or $146 per pair of contracts, is possible if BABA closes at or below $75 when August options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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