On Jan. 2, the price of Alibaba (NYSE:BABA) stock hit a new 52-week high at $219.98. And over the past year, the stock is up about 50%.
Now investors are wondering if the share price of Alibaba, a conglomerate of businesses, could soon reach $250. Although I firmly believe that the company will likely perform well in the long-run, on a short-term basis, it may be a good idea to take some paper profits in BABA stock.
In broader markets, good times might disappear as quickly as they have happened; thus taking some money off the table may be a prudent move.
Similarly, I’d urge investors to not commit all their intended capital to Alibaba stock in the coming days, especially before the release of quarterly earnings expected in late January. Any upcoming selloffs are likely to offer a dip-buying opportunity in BABA shares.
Can Alibaba Stock Have Another Strong Quarter?
When Alibaba released its Q2 earnings report in November 2019, investors cheered. Both revenue and earnings beat estimates as consolidated revenue for the group was up by 40% year over year and adjusted EBITDA increased by 39%.
Income from operations of $2.85 million was also a 51% increase from the same time last year.
When the group next reports earnings, analysts will pay attention to four main areas:
- Core commerce (BABA’s largest segment, revenue jumped 40% YoY);
- Cloud computing (revenue soared 64% YoY);
- Digital media and entertainment (revenue increased 23% YOY); and
- Innovation initiatives (revenue increased 14% YOY).
In Q2, total revenue strength was in good part due to Alibaba’s core commerce business, which brings in about 85% of total revenue. Core commerce is split into the ever-important China commerce retail as well as a smaller section that consists of logistics and international. In September 2019, Alibaba’s online China retail marketplaces, i.e., mainly Taobao and Tmall, had 785 million mobile monthly active users (MAUs), representing a quarterly net increase of 30 million.
In addition to core commerce, investors pay considerable attention to cloud computing in the quarterly report. Revenue and profit growth mainly in those two segments will likely determine whether future gains in the price of Alibaba shares will be possible following the Q3 report.
Alibaba’s New Retail Strategy Is Important
With a population of 1.4 billion people, China is the largest country in the world. Alibaba’s China commerce retail operations make up 66% of Alibaba’s total revenue.
The second half of the past decade in particular has brought several tailwinds for the growth of eCommerce in the country, including improved telecommunications and use of smartphones, rise of logistics and delivery networks, as well as higher consumerism fueled by sustained increase in personal income levels.
Yet online retail purchases only account for less than 20% of total commerce. And Alibaba is working hard to capture consumers both online and offline.
Over the past several quarters, Alibaba has been expanding its “New Retail” strategy, the phrase coined by Jack Ma, Alibaba co-founder and retired Executive Chairman.
According to management, the group aims to combine the best of offline and online shopping. For example Alibaba has been using data and technology extensively to improve the physical retail experience for consumers.
Analysts are overall bullish on Alibaba’s strategy and the prospects for capturing a greater share of China’s shopping pie. The Chinese Singles Day holiday on Nov. 11 racked up a record $38.3 billion worth of merchandise sold on Alibaba’s platforms. This number also bodes well for the overall strength health of the country’s e-commerce industry.
Q3 results in late January are likely to give better insight into how Alibaba’s core commerce operations did in the all-important holiday shopping season. About a third of BABA stock’s annual profits come during this period. Finally, it’s worth noting that Alibaba’s international commerce business is growing fast, too.
Alibaba’s Cloud Business Is Increasingly Important
Alibaba’s business segments extend into both online and physical retail, apps, digital media and entertainment, and increasingly the cloud. In cloud computing, it is now the market leader in Asia.
Its concentrated push deeper into the cloud space is increasingly being compared to the success of Amazon’s (NASDAQ:AMZN) cloud business, Amazon Web Services (AWS). While BABA stock’s cloud revenue revenue grew 64%, Amazon reported a a recent quarterly increase of 35% in its cloud segment.
BABA’s cloud business launched in 2009. Its service offering now includes remote cloud computing power, data storage, big data processing, as well as a content delivery network. The group has 43% of the public cloud market in China. The market share of Tencent Holdings (OTCMKTS:TCEHY), its biggest competitor, is about 10%. Amazon has the third place.
According to metrics provided by data wrangler Canalys, China’s outlay on cloud infrastructure increased 58% to $2.295 billion in Q2 2019. Comparable global spending spending went up by 37.6%. However, competition in China is cut throat, which also means that Alibaba as well as the others do not have much room to raise prices in the country. We are likely to hear increasingly more about the developments in the cloud space in the country.
As China’s cloud markets grows, so will Alibaba’s cloud business. With expected levels of growth in the cloud space, Alibaba’s total revenue is expected to grow by double-digit percentage rates. Such a growth rate would indeed be impressive for a company with a market cap of over $580 billion.
Like its core commerce business, Alibaba’s cloud operations will likely increase their overseas presence, too. I expect the cloud business to become BABA stock’s pride and joy in future quarters.
Short-Term Price Decline in BABA Stock Is Likely
Following the release of the Q2 report, Alibaba stock started its most recent bull run. In a matter of weeks, it has gone from about $170 to the current price of almost $215.
Investors do not have a crystal ball and it is never an easy task to know if a momentum stock like Alibaba has reached the peak for now or if it can have more room to run.
But I’d like to underline that because of the recent impressive run-up in the price of BABA stock, short-term technical indicators have become over-extended. Investors who pay attention to short-term oscillators should note that its technical message has also become “overbought.”
In the next few weeks, Alibaba stock could have a pullback toward the $200 level or even the $190 level, where the stock is likely to find major support.
BABA stock’s beta is 2.2, which means its more than twice as volatile than the broader market. Therefore, if other big tech names or China-based companies decline, especially as earnings reports are released, then Alibaba shares may also take a breather.
I’d suggest that long-term investors wait until BABA stock builds a base between $200 and $205. However, it you are able to handle some short-term volatility, then you may consider any dip in the price of Alibaba stock as an opportune time to go long the shares.
Yet, the daily volatility of Alibaba stock is high, giving it a wide trading range, so short-term traders should proceed with caution.
Bottom Line on BABA Stock
In 2019, prices of China-based stocks like Alibaba gyrated quite wildly depending on the the news headlines of the day. U.S.-China trade wars, economic slump in China and potential delisting of U.S.-listed Chinese companies gave investors plenty of anguish.
Well-performing stocks tend to repeat their robust performances. In Alibaba’s case, its strong cash flow from the core marketplace operations as well as the growth in cloud computing will likely be the main catalysts driving the BABA stock price to new highs in the new decade.
However, in recent weeks Alibaba shares have had a strong move up. Therefore some profit-taking can be expected. Exogenous events such as increased tensions in the Middle East coupled with rising oil prices, or a poor economic report from China may be enough to give shareholders the jitters.
Investors with a two- to three-year horizon may view any upcoming decline in the BABA stock price as a good opportunity to buy into the shares.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.