With sales growth projected to top 49% next year, and average nearly that through the end of this year, Alibaba Group Holding Ltd (NYSE:BABA) should be trading north of $200 by now. Lamentations about geopolitical woes and an overvalued U.S. stock market aside, Alibaba bulls are in for a treat this November. The Chinese e-commerce giant has not one, but two events that should drive the BABA stock price well north of $200 before December.
The first such event occurs this Thursday morning, when Alibaba will step up to release its fiscal second-quarter earnings report. Analysts are projecting a 30% rise in earnings to $1.03 per share and a 52% spike in revenue to $7.85 billion. Those are some impressive numbers, to say the least.
But projections could still be on the light side, as EarningsWhispers.com projects a whisper number of $1.10 per share. Given that Alibaba has a habit of routinely blowing out Wall Street’s expectations, a whisper number beat could be in the cards this Thursday.
If a strong earnings performance wasn’t enough, Singles Day takes place on Nov 11. This regional holiday is bigger than Black Friday for the Chinese e-commerce giant. This year, Alibaba has access to a plethora of U.S. retailers and is planning a “Retail as entertainment” event as well as a “See Now, Buy Now” fashion show to kick off this online shopping extravaganza.
Last year, consumers spent the equivalent of $17.79 billion on Singles Day, making it bigger than both Black Friday and Cyber Monday. And Alibaba is front and center for the event.
A look at sentiment heading into November reveals a heavy bullish bias from the brokerage community. In fact, nearly all 43 analysts following BABA stock rate it a “buy” or better, with less than a handful doling out “holds.” While that leaves little room for upgrades, there is plenty of room for price target increases, as the average consensus price target of $197.23 represents a measly premium of only about 8.6% to yesterday’s close.
Click to Enlarge Turning to BABA stock options pits, we find that speculative traders are nowhere near as bullish as the brokerage community. Currently, the November put/call open interest ratio comes in at 0.63. Yes, calls have a clear upper hand, but peak November call OI rests at the in-the-money $180 strike, with heavy call accumulations also at the $175 strike.
In short, these BABA stock speculators are not looking for the shares to rally much higher, even with earnings and Singles Day on the horizon.
Overall, November implieds are pricing in a potential post-earnings move of about 6.8%. This places the upper bound at $195.50, while the lower bound lies at $170.50. A post-earnings rally would leave BABA stock short of real overhead resistance at $200, while a decline should stop well short of $170, with the 50-day moving average in the $175 region.
2 Trades for BABA Stock
Call Spread: I believe that implieds are undervaluing both November events and that BABA stock could well surprise even the more bullish analysts. Furthermore, geopolitical concerns have largely overshadowed the Alibaba’s push to get American retailers on board with selling products in China — where there is a huge demand for such goods. We will see this demand reflected in Alibaba’s guidance and its Singles Day figures.
Traders looking to capitalize on BABA stock’s undervaluation might want to consider a Nov $195/$200 bull call spread. At last check, this spread was offered at 96 cents, or $96 per pair of contracts. Breakeven lies at $195.96, while a maximum profit of $4.04, or $404 per pair of contracts — a potential 320% return — is possible if BABA stock closes at or above $200 when November options expire.
Put Sell: As a more conservative alternative, traders can bank on technical support instead of directly betting on a BABA stock rally. Along those lines, the Nov $170 strike put sell has an excellent chance of finishing out of the money.
At last check, this put was bid at $2.37, or $237 per contract. If BABA stock closes at or above $170 by expiration, traders entering this position will retain the premium received for opening the position. However, if BABA stock trades below $170 ahead of expiration, then traders may be assigned 100 shares at a price of $170 per share, for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
