It has been a mixed run for Alibaba (NYSE:BABA) and it’s hard to put all the blame on the company. It’s my view that Alibaba stock doesn’t get enough love as it is, but the trade war between the U.S. and China really weighed on the stock.
Now granted, Alibaba is up almost 50% over the past year, joining names like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) in posting monster moves.
Keep in mind though, while these moves sound enormous — and given the market caps here, $4.5 trillion combined, it is — remember that the Nasdaq Composite fell ~20% from peak to trough in the fourth quarter, bottoming around this time last year. It’s not as if these stocks were riding high a year ago.
Case in point, while some of the stocks above have a better two-year track record, BABA stock is only up 22% over the past 24 months. That should help put things in perspective a bit.
That said, this stock is in the midst of a massive breakout. Can it continue in 2020?
Trading BABA Stock
Alibaba stock made a powerful breakout on Nov. 25. On that day — two weeks after Singles Day and three days before Thanksgiving — the stock gapped up over long-term downtrend resistance. Shares rallied 2% that day, adding another 2.2% in the following session. Shares then rallied 3.1% the next day.
It was a potent jump that helped kickstart the latest rally, which has been good for more than 13% over the past month. Alibaba stock is now working on its fourth straight week of gains — and coming into its prior all-time highs.
Set in the first week of June 2018, BABA stock topped out at just over $211. In the following week, shares again breached $211, but couldn’t take out the prior week’s high and promptly retreated.
The $200-plus level has been a troubling area for Alibaba stock, so it will be interesting to see if the stock can maintain above this level in the coming weeks. Ideally bulls will see BABA stock cool off a bit, and dip back down into that $200 to $205 zone. That can come from current levels near the prior highs or even after taking out the highs.
Ultimately though, the hope is that a pullback to this zone will act as support. If it does, it may very well be a buy-the-dip opportunity.
If $200 to $205 fails as support, a dip down to the $190 level may be in store. Further, the 23.6% retracement for the current 52-week range sits at at $191.08.
Valuing Alibaba Stock
I recently wrote about iQiyi (NASDAQ:IQ) and that one reason it struggles has to do with product recognition. While many U.S. investors are familiar with Alibaba, they aren’t familiar with it in the way that they are with Google, Apple or Amazon (NASDAQ:AMZN).
Given the investment choice between two of them, say Apple or Alibaba, many will opt for the former since they are more familiar with it than the latter. I’m not saying that lack of familiarity is the sole reason Alibaba doesn’t command a higher valuation, but given its growth rate, one might expect more of a premium in the stock.
Of course, it helps that Alibaba recently completed a massive secondary offering in Hong Kong. That came at the same time as the stock’s breakout, as investors around the world suggest that Alibaba stock may be worth more than investors were giving it credit for.
For instance, shares trade at 29.3 times earnings, about in-line with Microsoft. That’s despite the fact Alibaba is forecast to grow revenue 33.8% this year and 29.3% next year. That’s roughly triple the growth rate of MSFT over the same period.
On the earnings front, analysts expect 28.3% growth this year and 22.8% growth next year. In that sense, sub-30 times earnings actually seems cheap for a mega-cap tech stock growing sales at 30%-plus and earnings at 20%-plus over the next two years.
Of course, none of this matters if Alibaba can’t deliver. But with momentum in its business, strong cloud growth, a recent secondary offering and five consecutive quarterly earnings beats, bulls have faith BABA can keep it up.
I would love to see shares take a breather, giving it more runway for a continued rally in 2020. On a pullback, watch $200 to $205. Below and it may need more time to rest.