Alibaba Group (NYSE:BABA) is an incredibly well-run company with a huge total addressable market and a long runway for growth. So why then is Alibaba stock under a seemingly constant barrage of selling pressure? Simply put, the trade wars.
As tensions flare, the SPDR S&P 500 ETF (NYSEARCA:SPY) has been under pressure while the S&P 500 index quickly unwinds from its highs north of 3,000 points. But these are small declines compared to BABA stock. Shares are moving much faster, as the U.S.-listed Chinese mega stock sporting a $420 billion market capitalization gets hammered when trade talks deteriorate.
The latest comes as President Donald Trump said he would increase tariffs against China starting on Sept. 1. The selling intensified once the trade situation took a turn south on Sunday night, Aug. 4.
Here’s what we’re looking at on the charts.
Trading Alibaba Stock
Alibaba stock looks concerning, to say the least. BABA stock put together an excellent breakout over the $188 to $190 level but was soon buried in May. That’s when trade tensions flared up again and shares were sacked for a 24.5% loss in less than a month.
The equity never regained the $190-plus level, as it recently topped out near $180 this month. In just two sessions, BABA stock has broken below the following levels: the 20-day, 50-day and 200-day moving averages, as well as the 38.2% and 50% retracements for the one-year range.
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That’s why I said the charts look concerning.
So, where to from here? Given how quickly all of the above levels broke, I’d be surprised if the 61.8% retracement near $155 were to hold as support. While monitoring this level, I’m watching the June lows near $148, as well as the $150 level.
If this area holds, bulls have a reasonable level to measure against. Should Alibaba stock be in for another roughly 25% beating though, this level will not be the low.
From its recent highs near $180, a 25% decline takes BABA stock down to $136. Not much further below is what I consider “ultimate” support for Alibaba Group, down near $130.
Before we get too negative though, let’s see how the $148 to $150 level does. At the very least, it should act as a temporary buoy for BABA stock. At the most, it should be rock-solid support. Either way at this rate, it shouldn’t take long to find out.
Valuing BABA Stock
Alibaba stock is clearly out of favor when the trade-war rhetoric intensifies because it’s a China-based company. That’s even as its underlying business remains relatively strong. Like Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and other mega-cap tech plays in the U.S., these names do not usually hold up when volatility increases significantly even though business remains steady.
Alibaba Group has some similar features to these companies. For one, growth. Analysts expect approximately 33% revenue growth this year and around 30% growth in 2020. It’s not easy for a $400-plus billion market cap company to churn out 30% growth. But when they do, the markets usually reward their stocks with a premium.
On the earnings front, estimates call for 21% growth and around 28% growth this year and next year, respectively. With this year’s estimate of $6.75 per share, it leaves Alibaba stock trading at less than 23-times earnings.
That’s really not a bad price to pay for what many believe is a long-term growth story. Alibaba Group is an internet conglomerate in China and while there may be a lot of headwinds currently present, it could create a big opportunity in the future. An even deeper decline makes Alibaba stock an even more attractive long-term candidate.
I want to see if $150 can buoy BABA stock. Should it fail, sub-$140 should draw some interest from investors. However, $130 is a line in the sand.
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 GOOGL.
