The past few months have been miserable for Alibaba Group Holding (NYSE:BABA) shareholders. There’s no getting around it. BABA stock is down 31% from its June high, and given its momentum and the backdrop of bad news, things could get worse before they get better.
This is a case, however, where the sheer level of hysteria may have hijacked the stock, separating it from any semblance of value in favor of scintillating headlines.
It happens. Stand in front of that train at your own peril. At the same time, however, bear in mind that fear-driven hysteria doesn’t last forever. Once all the dust settles, investors will recognize that even the recent downgrades of Alibaba stock were, in a way, veiled bullishness.
Just for the record, BABA stock isn’t the only Chinese tech name under fire lately. Baidu (NASDAQ:BIDU) is burning as well, along with JD.Com (NASDAQ:JD). The fallout of the tariff war gets at least part of the credit/blame for the headwind, although there are other forces at work.
For investors though, the reason is irrelevant. The only detail they’re concerned with is, what’s next for Alibaba stock?
That’s not an easy question to answer when Alibaba is framed against a backdrop of new concerns.
Barclays analyst Gregory Zhao supplied one of them, in a sense, by virtue of lowering his price target on BABA stock earlier this week. KeyBanc did the same at around the same time. Ditto for Deutsche Bank, where analyst Han Joon Kim lowered his target from $196 to $189 on concerns that sales could be softer for the recently completed quarter than initially anticipated, as China’s economic engine sputtered. The recent decision from China’s central bank to lower interest rates confirms this economic cooling.
Meanwhile, the analyst community has been dialing back its earnings growth forecast for Alibaba, down to only 8% for the current fiscal year. That outlook was in the mid-20’s just a few months agos.
It’s a grim picture, but investors may let BABA stock fall too far.
Look at What’s Not Happening
Yes, analysts may be dialing back their price targets on BABA stock. This is a case, though, where investors would be wise to take a step back and look at what analysts aren’t doing, and where Alibaba stock is trading relative to their calls.
First and foremost, despite plenty of reason and opportunity to do so, the analyst community isn’t scaling back on their collective call on Alibaba. It was and still is a little better than a “Buy,” as it has been for a couple of years now.
Second — and this is a close second — the consensus price target for BABA stock, of $225.19, is still miles above the current price of Alibaba stock.
None of this is to suggest that analysts can’t be wrong. Averaged together as a group, however, they’re usually right. More often than not it’s investors that lose perspective, catapulting or cratering a stock’s price relative to some semblance of reasonable value.
And, it’s not a stretch to suggest the tumble BABA shares have taken since June has been unusually volatile, even by Alibaba stock standards. The selloff has also dragged BABA stock to a forward-looking P/E of only 19.0. That’s not dirt cheap by anybody’s standard, but it is a valuation as the very low end of Alibaba’s typical valuation spectrum.
Bottom Line for BABA Stock
The backdrop may be compelling, but don’t misread the message. Alibaba shares are falling, and just because the bullish thesis makes sense doesn’t mean the sellers are in the mood to ease up just yet.
On the flipside, the bullish argument for BABA stock does hold water. If and when the rhetoric of doubt and worry that has been weighing in on China’s tech stocks abates and it this current correction has finally run its course, Alibaba may well emerge as one of the top prospects to step back into.
Just be prepared for the possibility that the stock itself will turn the corner before any of its commentary does. That’s why you’ll have to watch the chart just as much as you monitor the headlines.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.