Before February, investors were basking in a low volatility environment and had been since the election. Gobbling up 2% to 3% pullbacks, they didn’t worry about a 5% or 10% decline. However, the mood all changed in February after a quick 10% pullback in 10 days. We have yet to see the S&P 500 retest its highs and we’re waiting for names like Alibaba Group Holding Ltd (NYSE:BABA) to bounce back. In that regard, what’s up with BABA stock?
Nothing’s up with it, really.
Alibaba stock price has had trouble retesting its highs, but that’s not uncommon. Just look at Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOGL) or even Nvidia Corporation (NASDAQ:NVDA). From a fundamental perspective, none of these companies have been in a better spot before.
The stocks just aren’t acting like it, and that’s the case with BABA stock price too. But, there is a way to trade it, which we’ll address first.
Trading BABA Stock Price
Current support in BABA stock price has been in place since mid-August. The current range of support and resistance has been in place since November. These levels currently rest near $175 and $195, respectively. At some point though, this range will fail. Bulls are hoping resistance will give way, as it did (albeit temporarily) in late-January. Bears hope support fails.
With shares at $193 as of this writing, it’s still unclear as to whether we see $175 or $195 next. Should Alibaba stock price pullback into support though, it’s a buy. Note, the 200-day moving average is just below as well. If this support fails, traders can cut their position with minimal losses.
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Traders can also look to buy BABA stock on a close over $195. Should this happen, BABA stock could be in the early innings of a big breakout. Just like those who buy on support though, should Alibaba stock price give us a “false breakout” — closing over $195, then falling back below into the current range — the trader can cut their position with minimal losses.
That’s the trade in a nutshell: Two perfect levels to buy at, $175 support and a $195 breakout.
Why Like Alibaba Stock?
BABA stock trades with a lofty valuation, there’s no getting around it. At 13.9 times last year’s sales and 48 times its trailing twelve months of earnings, Alibaba stock doesn’t seem like one we’d chomp at the bit to buy. But when considering Alibaba’s growth profile, its valuation really isn’t that bad.
First, looking at a company on a sales basis often doesn’t show the full picture. For instance, Snap Inc (NYSE:SNAP) trades with a massive sales valuation (27 times), as does Facebook (13 times). But the difference here is immense. Churning out operating margins of ~50%, a bulk of FB’s revenue drops to the bottom line. Snap has negative operating margins, meaning none of its sales make it to the bottom line.
This means one is highly overvalued — Snap — while one just looks overvalued — Facebook. BABA is much more like the latter than the former.
Because Alibaba has a whopping market cap of $496 billion, I think sometimes investors forget how fast it’s growing.
Analysts expect sales to grow 56% this year and another 40% in 2019. That’s rather remarkable given the size of this company. BABA’s no slouch when it comes to earnings growth, either. Analysts are looking for earnings per share of $5.25 this year, up more than 42%. For 2019, they expect another 28% growth.
The Bottom Line
Given its growth, 35 times 2018 earnings and 27 times 2019 estimates isn’t all that bad for BABA stock.
For investors that do feel it’s a little too rich, they can opt for FB or GOOGL instead. The stocks have lower valuations, but also lower growth.
They can also consider Microsoft Corporation (NASDAQ:MSFT), which has the lowest valuation of all four stocks. MSFT is working on boosting the faster-growing segments of its business, like the cloud. But it also has the lowest growth of all four companies as well.
All in all though, BABA operates in one of the largest markets, while the Chinese middle class continues to boom. Alibaba has its hands in seemingly every business imaginable and its growth figures prove it.
Plus, we have a perfect way to trade it.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell had a position in NVDA.
