Alibaba Holding Group Ltd. (NYSE:BABA) is scheduled to report fourth-quarter earnings on February 1st. But with BABA stock ending last week on fresh all-time highs, should investors be cautious heading into the quarter?
Internet stocks have been red-hot and quite frankly, so has most of the stock market. That should have many investors feeling at least somewhat hesitant. Perhaps not to the point of taking profits or going short, but at least to the point where they are not buying stocks with both hands.
When it comes to BABA stock, shares have made a clean breakout over multi-month resistance. This is quite bullish, should Alibaba stock stay above this level post-earnings.
We’ll get to the chart in a minute, but let’s start with the fundamentals.
Evaluating Alibaba Stock
The situation in China is quite encouraging. Although Alibaba is working to become a global powerhouse like Amazon.com, Inc. (NASDAQ:AMZN) most of Alibaba’s influence is in its country of origin.
The company had a stupendous Singles Day in China (November 11th), which will no doubt give the quarter a nice boost. Singles Day gross merchandise volume (GMV) climbed almost 40% year-over-year in 2017.
While other companies in the country — mainly JD.com Inc (ADR) (NASDAQ:JD) — also reported strong numbers, they pale in comparison. While JD’s numbers looked good at first glance, they also counted the ten days leading up to Singles Day. BABA’s numbers were only for November 11th. (For the record, I have liked JD stock for quite some time).
Put simply, Alibaba is no slow-grower; this baby is a beast.
Analysts expect earnings growth of roughly 43% in 2018 vs. 2017. Further, sales are forecast to grow more than 53% in the year. Sporting a market cap north of $500 billion, it’s tough to find a mega cap tech giant with this type of growth.
Even in FANG — Facebook Inc (NASDAQ:FB), Amazon, Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — we can’t find this type of growth.
So what are we paying for BABA stock?
Shares aren’t cheap, trading at 38 times 2018 earnings estimates. Analysts forecast another 30% earnings growth in 2019, meaning BABA stock trades at 29 times 2019 estimates. Admittedly, for some that premium is still too high.
The thing I like about Alibaba is China.
It’s a robust market with a swelling middle class — a middle class that will soon be larger than the entire U.S. population! China is more technologically advanced than many investors seem to give it credit for and that plays right into the e-commerce trend. This is a trend that Alibaba dominates and will continue dominating.
Trading BABA Stock
Click to Enlarge
After gapping above resistance near $160 in August, Alibaba stock has been rangebound between roughly $165/$170 and $190. This is observable on the chart between the black channel lines.
BABA stock has really found some giddy-up over the past week, however. Shares burst through resistance at $190 and quickly ran to $205. That makes it a tough trade with earnings on deck.
The prudent play for new investors would be to wait for a pullback to $190. This requires a bit of hope, but should it happen and $190 holds as support, we have a great risk-reward strategy.
If investors are long, they may be tempted to stay long.
The global economy has been strengthening over the past few quarters. Consumer confidence is rising and Chinese GDP results have been stronger than expected. That bodes well for Alibaba. In a nutshell, I don’t necessarily want to part ways with this company just because shares have become a bit overbought.
The Bottom Line For BABA Stock
If investors are long Alibaba stock, consider staying long.
For those who want to buy, we’ve seemingly missed our chance. A better risk/reward scenario exists on a pullback to $190-ish. Shares will either hold steady into earnings or perhaps retrace some of its gains as investors de-risk ahead of the announcement.
Hopefully we will get a chance to buy BABA stock, but right now isn’t the time.
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.
