Last week it was reported that Amazon (NASDAQ:AMZN) would exit its Chinese marketplace business in mid-July. One less competitor — that’s Amazon no less — should bode well for a company like Alibaba Group Holding (NYSE:BABA), right? Of course, it helps that the news around BABA stock is improving, as are the charts.
Chinese e-commerce players like Alibaba and JD.com (NASDAQ:JD) are direct beneficiaries of a partial exit by Amazon. However, Chinese equities in general had been under heavy pressure as the trade with the U.S. and slowing Chinese economy both weighed on the share prices. That’s true for Alibaba stock, but also names like iQiyi (NASDAQ:IQ), Baidu (NASDAQ:BIDU) and others.
So is it off to the races now? No, not exactly. But Alibaba has plenty of positive potential catalysts and is one of the larger players when it comes to global e-commerce firms.
Valuing Alibaba Stock
At least when compared to FAANG stocks, BABA stock quietly sports a massive market cap, weighing in at roughly $480 billion. Unlike some blue-chip tech stocks, Alibaba doesn’t pay a dividend, but with its balance sheet, it could if management so chose.
Alibaba has almost $32 billion in cash and $33.5 billion in combined cash and short-term investments. Total current assets of ~$41 billion is almost twice its total current liabilities of $21.65 billion. Even though long-term debt stands at $19 billion, current assets of $114.3 billion should ease any financial worries over BABA stock considering it’s almost triple the $44.7 billion in total liabilities.
If any worries do exist about Alibaba’s financials, perhaps the company’s growth can take care of that. Current estimates call for a whopping 55% revenue increase in 2019 and another 35.5% jump in 2020. That easily outpaces BABA’s immediate peers, as well as its U.S.-based FAANG peers. Earnings growth is less impressive, but solid nonetheless. Estimates call for 15.6% improvement this year to $5.48 per share, while 2020 estimates call for an acceleration to ~23%.
That leaves BABA stock trading at 33.8 times earnings, which doesn’t exactly feel like a discount. On a forward basis, Alibaba stock trades at roughly 28x forward earnings. That’s actually slightly below its five-year average of 29x forward estimates. Ultimately, some investors will feel uncomfortable paying 34 times current earnings and that’s just the way it is.
Alibaba has various businesses in one of the world’s largest economies. While China is struggling through a dry patch economically, it’s anything but done growing. For this strong of revenue growth and solid earnings growth, many will flock to BABA stock — especially if its charts start to cooperate.
Trading BABA Stock
Click to Enlarge
Shown above is a longer term, 30-month weekly chart of Alibaba stock. Below is a shorter term six-month chart, but both show a very similar setup for BABA stock. That is, a series of higher lows pushing the stock price higher while overhead resistance keeps a lid on any potential rally.
On the monthly chart, we can see that $190 has played a role in the past as well. So long as BABA stock stays above the 10-week moving average and uptrend support, there’s little reason to get overly bearish on the name.
Click to Enlarge
On the daily chart, we can see that short-term resistance is actually a little lower, near $188. For almost two months now, this level has stymied BABA stock, while shares have been trending higher for about four months now.
Like the weekly chart, as long as BABA stock stays above uptrend support and its 50-day moving average, bulls are still okay. Below these levels and at the very least, Alibaba may need to reset, if not trade lower before becoming a buy again. A breakout over $190 could trigger a rally north of $200.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AMZN and IQ.
