Since reporting earnings, it has been mixed action for Alibaba Group Holding Ltd (NYSE:BABA). BABA stock fell about 1% Wednesday, but is still up more than 2% for the week. The simple fact is, it has had trouble clearing $188 for any sustainable amount of time.
I’m surprised we haven’t gotten more of a rally from Alibaba stock lately. Earnings aside (for a moment), there have been a lot of catalysts lining up its direction.
First, the momentum in most of Alibaba’s business segments (via its own operations or by investment) remains strong. Social media, e-commerce, cloud-computing and electronic transactions are all doing really well. Don’t take my word for it. Look at Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), Netflix, Inc. (NASDAQ:NFLX), PayPal Holdings Inc (NASDAQ:PYPL) and Amazon.com, Inc. (NASDAQ:AMZN).
All of these companies are having strong quarters and show strong underlying trends going forward. Their stock’s reflect that outlook as a result. Alibaba’s stock did too by popping higher — well, initially — as its quarterly results were good.
Further, I thought the lead-up to Single’s Day on Nov. 11 would help BABA stock more. Admittedly though, Alibaba stock is up more than 100% so far for 2017, so perhaps this event is having a more muted impact. With a few days to go, maybe that will change for the better.
Alibaba’s Momentum
The company’s earnings report was very impressive. Earnings of $1.29 per share came in almost 25% above analysts’ $1.03 per share estimate. Revenue beat expectations while soaring more than 60% year-over-year (YoY). Show me another $475 billion market cap company growing its sales at more than 60% — I’ll wait.
The momentum here is simply jaw dropping.
Analysts see that growth slowing, but not by a whole lot. They expect revenue growth of 49.5% in fiscal 2018. Incidentally, that’s at the low end of the 49% to 53% range management provided last quarter. In essence, BABA still has the potential to beat those estimates going forward.
On the earnings front, analysts are looking for 38% growth this year and 34% next year. BABA stock may trade at 63 times trailing estimates — but don’t bail on this article on that alone! It trades at a far more reasonable 28.5 times forward earnings estimates.
Certainly not cheap, but far from being vastly overvalued given its impressive earnings growth. Particularly compared to GOOGL at 26 times forward earnings and 29% growth next year or Microsoft’s 23 times forward estimates and 11.3% growth. AMZN stock trades with a forward price-to-earnings ratio of 141, but its earnings-based valuation has never been reasonable. At least BABA’s is. And for the record, I have been bullish on some of these stocks too.
I’m not saying that Alibaba can’t or won’t slow down. And I wouldn’t necessarily go all-in today either. I’m just saying it’s investing or operating in secular growth themes while simultaneously seeing immense growth in its core businesses. After all, cloud revenue climbed 99%, while core e-commerce, by far its largest segment, jumped 63%.
Trading BABA Stock
Click to Enlarge
Our target was hit about a week before earnings and BABA stock then quickly ran to the mid-$180s ahead of the event. Earnings then sent it north of $190 and $200 was looking realistic with Single’s Day on tap. But those gains lasted only hours, if that, and BABA stock fell. Another rally to $190 failed, as $188 has been acting as resistance.
Provided that the broader markets do not cede much ground to the bears, I think BABA stock will eventually wear this resistance level down. Meaning I think it will push through $188-$190. From there, the post-earnings highs of $191-and-change will be in sight. If and when BABA stock can chew through this chunk of resistance, it will put it on a clear path to $200.
The good news? $185 continues to hold as support. So long as it does, BABA stock can resolve to the upside. Should $185 fail, it puts our trend line back in play, likely in the mid-$170s. There, investors can either add to longs and/or set a stop-loss should that level fail as support.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in BABA.
