Unlike some of its big tech peers like Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), Alibaba Group Holding Ltd (NYSE:BABA) hasn’t had much luck in trading higher. In fact, BABA stock price is now flat for the fourth quarter.
What should investors expect going forward? I think BABA stock is a buy, but determining at what level to buy is something to consider. Let’s see what we’ve got.
First, the Fundamentals
Before we look at the stock chart, let’s see what’s going on under the surface. Nothing has happened this quarter to justify Alibaba’s fall from $192 to roughly $170 where it trades now.
While Alibaba trades with a price-to-earnings (P/E) ratio of 48, its forward P/E ratio of just 26 is far more reasonable. Particularly when considering the Chinese e-commerce giant’s growth. Analysts expect sales to grow a whopping 53% this year and another 37% next year.
Find me another company with a $440 billion market cap that’s growing sales in excess of 50%. I’ll wait.
Facebook Inc (NASDAQ:FB) gets close, with 45% sales growth and a $520 billion market cap. But that’s it. Further, analysts forecast Alibaba to grow earnings 42% this year and a further 30% next year. All of sudden, the valuation doesn’t look too bad. Its sales multiple of 14.7 is high too, but there’s an explanation for that as well.
First, consider that that multiple is based on BABA’s trailing 12 months of sales, a figure that’s set to grow more than 50% this year. Additionally, Alibaba sports operating margins and profit margins in excess of 30%. That easily tops Apple Inc. (NASDAQ:AAPL), Microsoft and Alphabet, some of the most profitable names in tech.
It comes in behind Facebook, which boasts incredibly operating margins of 48%.
In a nutshell, Alibaba is easy to discard with a glance at its valuation. But upon further inspection, we see that it’s really not that bad.
Trading BABA Stock Price
We can see that BABA stock price has fallen below trend-line support (green line). However, it’s holding up around $170, a minor level of support. I would love to see the stock drop down to $160 and fill the gap. If that price action were to develop, it would put BABA stock close to its 200-day moving average too.
This should be another strong level of support.
Click to Enlarge
Simply put, Alibaba is a great company but its stock is sort of in no man’s land. Shares don’t look well and I’d love to buy this online juggernaut on a decline into strong support. Conversely, I would hate to miss out on BABA’s potential run because we were looking for too much of a decline. After all, a decline to $160 would mark a 16.6% fall from its recent highs.
Investors could start a position here and add on further weakness. I am not opting to do that myself, because I’d rather improve my risk/reward by waiting at least to a decline of $165. However, if the stock is able to breakout over its previous trend-line support (green line), then I would also consider buying shares.
Bottom Line on BABA Stock
Ultimately Alibaba is a phenomenal company with many different businesses. Its progress on mobile, in e-commerce, A.I. and the cloud are all very enticing from a growth perspective. Not long ago, we made the case for the stock to run to $200. MKM Partners analyst Rob Sanderson goes a step further, assigning a $220 price target. He says investors should buy the recent weakness in BABA.
In fact, he believes consensus estimates for the current quarter are too low and that Alibaba should do well as it goes into “strong seasonality, solid consumption trends and continued monetization improvements.” He contends that BABA has the best fundamentals among mega-cap internet stocks.
In short, we really just want to combine strong fundamentals with a compelling chart. While Alibaba certainly has the former, BABA stock is lacking the latter. Either a breakout back into more bullish territory or a pullback into support will make it a far more tempting buy.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
