Alibaba Holding Group (NYSE:BABA) hasn’t had the best few weeks. After BABA stock hit a high just over $210 in mid-June, shares quickly cascaded lower, falling to almost $180 by July.
I think there are several factors at play here. The first, several economic data points out of China came in below expectations. It’s got investors worried about the country’s growth and what it’s consumers purchasing power will look like.
Second, the Chinese stock market hasn’t been doing all that well. In fact, very quietly, the iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI) briefly dipped into bear market territory last week, as it was down more than 20% from its January highs. Third, Chinese momentum names lost all of their mojo. Stocks like iQiyi (NASDAQ:IQ), Bilibili (NASDAQ:BILI), Huya (NYSE:HUYA) and Sogou (NYSE:SOGO) have all been under serious pressure after exploding higher in late May and early June. Conveniently, this group has been consolidating and so too has BABA stock.
Fourth, the ongoing trade war discussions between the U.S. and China are persisting. While that may not have a direct impact on Alibaba, the rhetoric doesn’t help investor confidence and their outlook on the global economy. Fifth and finally, China’s currency has been under pressure, which has also negatively impacted BABA stock.
So Can BABA Stock Still Rally?
Clearly there are a few possible catalysts in play for why BABA stock has been underperforming. Still, investors should feel comfortable overlooking some of these catalysts.
To address some of the latter points, Chinese momentum names don’t drive Alibaba. While it might hurt short-term sentiment — just like the trade-war rhetoric — it doesn’t have an impact on Alibaba’s bottom line. Currency fluctuations do though, and several analysts have been ratcheting down their expectations. However, most of them still maintain a buy rating and big price targets.
One of those analysts is Colin Sebastian of Baird. He trimmed his earnings outlook but maintains a buy rating and $220 price target, implying 14% upside. Another analyst is Mark Sanderson of MKM Partners. He explained that currency devaluation has historically hurt BABA stock, but each time it was an attractive buying opportunity. He maintains a $280 price target, implying 45% upside from current levels.
In fact, there’s been a number of other big calls this month. Keybanc analysts slapped a $235 price target on BABA stock while SunTrust hit it with a less inspiring $215 price target. But Susquehanna analysts take the cake with their $305 price target. Their outlook implies more $110 per share in upside or 58% upside.
That’s no small move for a stock that sports a $475 billion market cap. But given Alibaba’s massive growth rates, it’s actually not as crazy as it seems.
The underperforming Chinese stock market and disappointing economic results are harder to shrug off when it comes to BABA stock. With that said, expectations aren’t coming down too much for the e-commerce conglomerate.
Analysts expect ridiculous revenue growth in 2018, with estimates calling for an almost 60% jump from 2017. Next year, they expect sales to grow another 37.5%. On the earnings front, estimates call for 25% growth this year and an acceleration to 34% next year.
The acceleration in earnings growth despite the deceleration in sales growth shows that analysts expect margins to increase as well. Trading at just 29.5 times this year’s earnings is pretty reasonable for the Alibaba empire. Think if Amazon.com, Inc. (NASDAQ:AMZN) traded for just 30 times current earnings. Investors would be jumping all over it with every penny that they had.
Alibaba also operates in a much larger market, meaning it has longer term potential.
Trading BABA Stock
With all that said, BABA stock tumbled more than 14% in just a few weeks.
So far, BABA stock bounced right where it needed to, on its semi-questionable trend-line support. Like Facebook Inc. (NASDAQ:FB), the situation may not be perfect. But with such attractive growth rates and such a reasonable valuation, BABA and FB can only stay down for so long.
At $192, BABA stock is in between two major levels. It’s not out of the woods until it’s back above $200. If bears feel the need to be short, I wouldn’t stick around if BABA gets back above that level. For bulls looking to buy, consider pullbacks into $180, as well as $165 to $170. Finally, consider buying on a break over $200 and look for a run back to $210.
If it can get above $210, new highs will be in sight.
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.
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