Following a phenomenal move post-earnings of over 12%, shares of Alibaba Group Holdings, Ltd (BABA) are looking a little exhausted after back-to-back gap-up days. With Alibaba stock no longer cheap fundamentally, and with complacency at an extreme, I look for BABA stock to retrace some of the recent big gains.
While earnings did handily beat on both revenues ($4.8 billion in revenues versus expectations of $4.61 billion) and earnings (52 cents versus 38 cents consensus), it was the growth in Monthly Average Users (MAU) that really stood out. MAU grew at a torrid 39% year over year to an astounding 427 million. The law of large numbers makes this type of continued growth virtually impossible going forward, so this will be as good as it gets for Alibaba.
Also important to note that while earnings did grow, the price-to-earnings multiple expanded by even a greater degree. With BABA stock now trading at about a 22 P/E multiple, it is now at the highest valuation level in nearly a year.
Click to Enlarge BABA stock is looking technically tired, having had its best two-day move in history.
Yesterday’s price action was telling, with the stock making a new recent high at $98.86 only to retreat and close lower on the day at $97.17. This type of reversal day is many times a telltale sign of a top in the stock, signaling an exhaustion in the buying.
Click to Enlarge BABA stock did also fill in the gap at $98.45 on the chart going back to late January of 2105. This should now provide some serious technical resistance for Alibaba moving forward.
From an options standpoint, complacency is certainly at an extreme. Implied volatility (IV) is only at 6% and is trading at a large discount to historic volatility.
Alibaba stock IV is at the lowest level since May of 2015 (also following earnings) which marked a significant top in BABA stock.
Click to Enlarge So with future growth tempered by the law of large numbers, stock valuation no longer cheap, and BABA stock looking a little tired technically, a guarded bearish position makes sense.
In my previous post on BABA, I suggested a short call spread as the best choice for structuring a bearish position, given that IV was much higher. With IV now at trough levels, options are dirt cheap, so a long put spread position is the preferred structure for implementing a bearish stance.
Trade Idea for BABA Stock
Buy BABA September $95 puts and sell BABA August $95 puts for $1.50 net debit.
These are both the regular monthly options, expiring September 16 and August 19 respectively. Ideally, BABA closes near $95 this Friday for the maximum gain.
Maximum risk is limited to the initial net debit of $150 per spread.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
