Alibaba Group Holding Ltd (NYSE:BABA) is rocketing higher Thursday on an eye-popping announcement from an investor event this morning. Alibaba is forecasting its largest quarterly increase in revenues since its 2014 IPO — 45% to 49%, up to $34.3 billion, for this year, fiscal 2018 — and that has BABA stock up by double digits in premarket trade.
Alibaba has been called the Chinese Amazon.com, Inc. (NASDAQ:AMZN). But especially in light of this morning’s news, I think that sentiment is selling the potential of BABA short — and I have a couple of ways to trade bullishly if you agree.
Yes, Amazon is currently much bigger than its Chinese counterpart, with a market valuation just shy of $480 billion compared to roughly $300 billion for BABA stock. What’s more, Amazon has been on a tear lately, dominating the U.S. e-commerce market and drawing in technical traders by the droves after topping the $1,000 mark.
But Alibaba has something that Amazon doesn’t have — access to Chinese consumers.
Stateside, we’re often lulled into complacency that the U.S. economy is the best. And, for now, that belief is holding true. But China’s economy has seen average gross domestic product (GDP) growth of 6.5% for the past several years, compared to U.S. GDP growth that has barely topped 3% growth at the best of times since 2008.
What’s more, Alibaba has a considerable edge when it comes to China’s e-commerce market. In the states, e-commerce is forecast to grow between 8% to 12% in 2017, based on Census Bureau data, putting the U.S. market at about $443 billion on the high side. Meanwhile, China’s e-commerce market hit $1 trillion last year and is expected to top $1.5 trillion in 2018.
You can see why Amazon really wants into China, but try as it might, the company has made little to no headway. BABA, meanwhile, is not only smack in the middle of the Chinese e-commerce revolution, but it already has its hooks in the U.S. market — those expanding there could take a bit more time, given the current political climate.
Given the rate of growth in the Chinese e-commerce market, Alibaba can afford to proceed at its leisure. With analysts forecasting average revenue growth of 40.1% over the next three quarters for Alibaba, and Amazon anticipated to average 21.6% sales growth for the same period, it’s not a matter of if Alibaba will be bigger than Amazon, but when.
Click to Enlarge So, the question becomes “Do I buy BABA stock now?”
If you’ve got the right appetite for risk, the answer is a resounding yes. The problem, however, is that Alibaba stock is trading near all-time highs and is just shy of overbought levels. That said, BABA stock has been in this exact position since the beginning of April, and yet the stock continues to defy selling pressure and trek higher.
Luckily, you can use Alibaba options as insurance to mitigate the risks of a retreat while adding this red-hot Chinese e-commerce titan to your portfolio.
2 Trades for BABA Stock
Put Sell: Selling put options can be used for more than just collecting premium on a sidling stock. You can also use these options as a way to essentially name the price you want to pay to add the underlying stock to your portfolio. With the risk of a correction in BABA stock rising alongside the stock’s continued advance, you can sell Alibaba puts to acquire the shares if they hit your desired price target — and get paid to do so.
Right now, a pullback to or below $125 would represent a buying opportunity. Setting $125 as your target buy price, you could sell a Jul $125 put for $3.65, or $365 per contract and wait for the shares to pull back.
If BABA stock doesn’t trade below $125 by the time July 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 $125, leaving you sans the shares, but still banking the premium for selling the options.
Call Spread: If you’d rather just bet on a continuation of the current BABA stock rally, the July $140/$145 bull call spread has potential.
At last check, this spread was offered at 32 cents, or $32 per pair of contracts. Breakeven lies at $140.32, while a maximum profit of $4.68, or $468 per pair of contracts, is possible if BABA stock closes at or above $145 when July options expire.
As a note, these options prices could change drastically at the open given this morning’s news. Adjust the targets appropriately, and per your own risk tolerance.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.