Alibaba (NYSE:BABA) stock was breaking out a month ago. But then the trade war — which was seemingly coming to an end — abruptly intensified. As a result, Alibaba stock has declined along with equity markets.
While the PowerShares QQQ ETF (NASDAQ:QQQ) is rather quietly down about 10% over the last month, BABA stock price has slid 16% in just one month. Talk about a painful failed breakout!
Obviously, many traders have moved to the sidelines on Alibaba stock, and some are shorting BABA stock. Long-term owners of BABA stock are beside themselves though, wondering if now is the time to scoop up more shares. After all, Alibaba’s business is still performing really well.
So should investors consider buying BABA stock?
Valuing Alibaba Stock
In September, it will be five years since Alibaba went public. Despite that, the company is still churning out impressive growth.
Analysts, on average, expect Alibaba’s revenue to surge 50% this year to $54.3 billion. Estimates, on average, call for another 35.5% growth in 2020 to $73.5 billion. Considering that the market cap of BABA stock is abiut $400 billion, these growth rates are through the roof. While it’s always possible that Alibaba will fail to achieve these growth rates — perhaps due to a drag on the Chinese economy from the trade war — if it can meet the expectations, its growth will be simply stunning.
On the earnings-per-share front, the average estimate calls for 2019 growth of 10.5% to $5.24. For 2020, analysts, on average, call for an acceleration to 24.5% growth and $6.52 per share. While I would consider a profitable company growing revenue at a 50% clip as a solid deal at 23 times this year’s earnings, others may not.
Helping drive Alibaba are similar catalysts to what’s boosting Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT). That is, BABA stock price has been propelled by cloud computing, e-commerce, financial services and entertainment. At its present valuation, BABA stock is more expensive than GOOGL, cheaper than AMZN and roughly in-line with MSFT. Is Alibaba stock as or more attractive than Alphabet or Microsoft?
That’s what investors have to ask themselves. While GOOGL and AMZN face antitrust investigations, Alibaba has a trade-war stigma attached to it. Could looming tariffs end the bull market? Theoretically, it’s possible. But I will say this: long-term investors looking for non-cyclical growth in China should at least consider Alibaba stock after its recent drumming.
Trading BABA Stock
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Loop Capital analysts are bullish on Alibaba stock, as they recently slapped a “buy” rating on BABA stock with a $250 price target. I don’t know if that’s realistic given our current trade-war climate or the fact that the record-high Alibaba stock price was just under $212.. Over the long term, I, like Loop, believe that BABA stock price will rise.
Currently, BABA stock price is stabilizing near $150. It’s encouraging to see the shares find their footing, even if only temporarily, after such a rough slide. If $150 holds, look for BABA stock price to bounce back up into the $165 -$170 range. This area has been notable in the past as both support and resistance for Alibaba stock. Further, the 10-week and 50-week moving averages are both in this range.
I expect this area to become resistance for BABA stock, at least on the first test. Worth pointing out is that the 10-week moving average is crossing below the 50-week. That is a bearish development for Alibaba stock, indicating that its momentum favors sellers, not buyers. Last time that happened, in August 2018, BABA stock ultimately double-bottomed at $130.
If BABA stock price drops meaningfully below $150, look for buyers to step in between $130 and $140.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Kenwell is long AMZN and GOOGL.
