Last weekend, Alibaba (NYSE:BABA) raked in over $30 billion in sales in just one day. While this sounds impressive, it still wasn’t enough to impress BABA stock investors. Although this year’s single day event beat last year’s numbers, Wall Street was still disappointed, so the stock fell on the news.
Beyond this recent drop, 2018 has been a generally tough year for Alibaba stock: In fact, it is down 20% year-to-date. This is partly because of the trade war with China, but not entirely. The iShares China Large-Cap ETF (NYSEARCA:FXI) is only down 13% for the same period, so even compared to that, BABA stock still lags.
This alone is not a reason to throw away Alibaba stock. There still is opportunity in it, especially if you’re already long the stock. So is it time to sell BABA? The answer is no, not here.
To be a successful trader, you need to know where a stock is headed, so it is important to almost ignore where it came from. Even though BABA stock has had a tough 2018, over two years it’s up more than 50%. So it’s not Amazon (NASDAQ:AMZN) performance, but it clearly outperforms the market.
Fundamentally, Alibaba’s price-to-earnings ratio is at 44, which may seem cheap relative to a company like Amazon, but it’s more expensive than Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and it’s almost twice as expensive as Apple (NASDAQ:AAPL). So there still might be froth to shed even after all the year-to-date pain.
But the technicals say that maybe we should wait before selling Alibaba stock at these levels; 2017 was a banner year for BABA stock. It had a few pivot points that were big price resets. And they created a band of support that is still below the stock.
Recently, Wall Street successfully tested them for the first time. So for the time being, the bulls are willing to hold above them. These areas of contention create congestion thereby becoming forward support.
So from here, this should be solid footing for Alibaba stock to remount an effort for a rebound. But it will need the entire market’s help, meaning if the stock market correction continues then the stock could retest $125 per share or lower.
But even then, I still won’t panic out of BABA stock.
So if I haven’t sold the stock yet, it’s probably too late to sell it here. Conversely, if I’m thinking of shorting the stock, I would delay that decision for at least a few days to see how this consolidation zone develops.
Bottom Line on BABA Stock
The macroeconomic environment is still favorable to the bull thesis, but we have three egos that are in charge of the global markets. President Trump of the U.S. and President XI of China need to come to their senses before they destroy the global economy. They have the opportunity to do it in a few weeks and cooler heads should prevail. There is too much to lose for both sides.
In addition, there are worries that the U.S. Federal Reserve may tighten rates too far and too fast thereby causing an economic slowdown in the U.S. that could be contagious. Chairman Jerome Powell needs to let investors know that he is not intent on doing this on purpose. Wall Street misses the soothing words that Yellen used: The Fed action plan is data-dependent. So far, Powell has refused to state this.
The bottom line for Alibaba stock is that there has been pain in 2018, but nothing goes up in a straight line. Over the last few years, this BABA has still been a winner. So unless I am day trading, I won’t be quick to throw that stock away yet. Management has proved it can deliver on its promises so it deserves the benefit of the doubt a little longer.
Wall Street experts agree, since they all have it as a BUY and yet it still trades well below their lowest price targets. But the longer it trades below their potential, the higher the odds of some of them resetting their expectations lower. Such headlines tend to have a negative effect on stock prices, but it will be short term.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.