This morning, Chinese online retailer Alibaba (BABA) released its fiscal-first-quarter results, and based on trading in Alibaba stock, it’s clear that the report didn’t hit the mark.
For the quarter, Alibaba earnings came in at 59 cents per share, beating Wall Street expectations by a penny. The problem number was revenues — Q1 sales of $3.265 billion missed estimates for $3.376 billion.
BABA did, however, announce that it would be purchasing $4 billion worth of Alibaba stock over the next two years as part of a share repurchase program.
In all, the report is textbook stuff for this market. Miss on the top line, hit on the bottom and make everyone feel better by buying back billions in shares that will have a positive accounting effect (but not a real fundamental effect) on earnings down the road.
The message is being lost on traders this morning as Alibaba stock is off some 6% in Wednesday’s trading. And from our perspective, sentiment is going to play a key factor in the next 20% move in BABA.
Reading Alibaba Stock From Here
Going into earnings, Wall Street recommendations appeared to be pricing high expectations into the stock’s performance for the second half of the year. As of yesterday, 93% of the analysts covering Alibaba stock ranked it a buy or better, which is extremely high compared to the average 55% buy recommendations on Nasdaq-100 stocks.
This earnings miss will cost BABA shares dearly from a technical perspective, too.
Alibaba stock closed Tuesday night at the $76 level, which is extremely key for those monitoring technical charts as it represents a failed double bottom along with the early July lows. Breaking through this double bottom will send a sell signal across chart watchers’ screens, adding to the selling pressure for BABA shares.
The technical picture continues to break down as BABA shares are now in a long-term bearish downtrend that has them approaching the $68 IPO price — a situation that will have even those lucky enough to participate in the IPO thinking about selling.
The additional turmoil over the Chinese economy will add a level of cloudiness to the already stretched fundamental outlook for Alibaba stock.
Finally, expect to see many of those bullish analysts pulling back on their expectations — which, by the way, will turn into a cycle in which analyst downgrades send shares lower, prompting other analysts to drop their targets to keep from being left too far behind.
Alibaba stock is a falling knife — one that investors shouldn’t be trying to catch right now.
That 20% move? We expect it to be on the downside.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
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