Shares of Alibaba Group (NASDAQ:BABA) are once again poised to break out at the $200 area. BABA stock has been on a bull run since beating earnings and reporting Singles Day sales that exceeded expectations. No question that Alibaba continues to grow. How much to pay for that growth is the real question. Alibaba stock has come too far, too fast. Time to say “bye-bye” to BABA, at least for the near-term.
Although Singles Day beat last year by 25%, the rate of growth slowed from 27% the previous year. This makes intuitive sense as growth percentages invariably come down as the actual numbers get larger. A little math may shed some light. This year Alibaba had over $38 billion in Singles Day sales. Extrapolating the 25% growth rate over five years would equate to $115 billion in Singles Day sales in 2024.
If you believe that isn’t a little extreme then by all means buy BABA with both hands at current prices. To me, however, that seems like a difficult proposition at best. Caution is warranted as Alibaba breaks past $200.
BABA Stock Chart and Valuation
Click to EnlargeAlibaba is looking rather rich on a valuation basis. Price to sales (P/S) is back over 8 and approaching the richest ratio in the past six months. The previous two times P/S neared 8 marked significant short-term tops in Alibaba stock. At some point valuations will matter again, especially given that growth is necessarily slowing. Further multiple expansion seems unlikely. This will provide a headwind for Alibaba stock over the coming weeks.
BABA stock is getting decidedly overbought on a technical basis. 9-day RSI is once again at levels that have signaled tops in the past. Bollinger Percent B breached 100 before finally weakening. The Detrended Price Oscillator is back near the highs of the year. MACD is also nearing extremes. Alibaba stock is trading at a large premium to the 20-day moving average which has led to pullbacks in prior instances.
In my previous article on Alibaba stock I had a bullish outlook with BABA trading near $175. Now that Alibaba has rallied nearly 15%, my outlook has changed as well, because price does matter. I don’t expect a major drop, but a retracement of the recent red hot rally seems likely.
Important to also remember that nothing concrete has been accomplished on the U.S.-China trade war, even though stocks are priced as if a deal is all but done. Any rumblings out of Washington or Beijing could torpedo the unrelenting rally at any time.
Trading Alibaba Stock
Stock traders should look to short BABA on any further strength. A pullback to the previous resistance level at $188 would be my initial downside price target. A meaningful break above the all-time highs at $211 is a viable stop out point. Alibaba doesn’t pay a dividend so there’s no issue owing the dividend if you short the stock. Earnings aren’t due until the end of January.
Option traders can take advantage of comparatively cheap implied volatility and position for a pullback with a put diagonal spread. Buying the January $195 puts and selling the December $190 puts would cost about $3.50. Maximum risk on the trade is $350 per spread.
Ideally Alibaba stock closes near $190 at December expiration. The trade structure also allows for additional selling of shorter term weekly put options to further hedge the position and lower the initial cost.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.