When the trade war was creating a minefield in the stock market, it was almost impossible to get a handle on Alibaba (NYSE:BABA), JD.com (NASDAQ:JD) and other Chinese equities. Fast-forward to 2020 and these names are acting resilient despite a coronavirus outbreak sweeping through the country and spreading to the rest of the world.
What gives?
These stocks would have seemed like surefire sells not that long ago. Let’s put it this way. If, on January 1st, you were given “insider information” that the coronavirus would spread this rapidly after originating in China and essentially shutting down their economy at one point, would you be a buyer or seller of Alibaba stock?
In hindsight, you may have trouble saying “sell.” But that’s exactly what a number of investors would have done. That goes for JD.com, Baidu (NASDAQ:BIDU) and any number of Chinese stocks. About the only one that I would have thought stood a chance was iQiyi (NASDAQ:IQ), because with so many people quarantined, what better to do than stream videos?
Getting back to business, let’s look at the charts.
Trading Alibaba Stock
To be fair, Alibaba stock isn’t exactly at its highs. But down just 8.5% from its highs — while JD.com is at new 52-week highs — is pretty darn good. That’s outpacing the PowerShares Nasdaq ETF (NASDAQ:QQQ), as well as all U.S. mega-cap tech stocks.
That group, which consists of names like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOG), are down between 10.5% and 14%.
Anyway, back to Alibaba. Shares do have a downtrend resistance mark squeezing the stock lower, shown via a blue line on the chart. Alibaba bucked the trend for most of Thursday, but simply could not overpower the selling pressure in the session. As such, the 50-day moving average is, technically speaking, still acting as resistance. At the same time, the 100-day moving average is acting as support.
Support also comes into play near $200.
Now near the middle of that range, traders need to wait for some kind of resolution. Put simply, there are four outcomes: Pull back to support; support fails. Pull back to support; support holds. Rally to resistance; resistance holds. Rally to resistance; breakout.
For Alibaba stock to pull back to support, that means declining to the 100-day moving average and $200 level. There, support will either hold and send shares higher, or it will fail and put $190 and the 200-day moving average on the table.
On the upside, Alibaba may rally up to the 50-day moving average and downtrend resistance (blue line). If this acts as resistance, shares will go lower. If the stock reclaims this zone, $225-plus is possible.
Sound overly simplistic? Good. The simpler, the better — especially in this type of environment.
Valuing Alibaba
For those of you that aren’t using the technicals to form your thesis, what does Alibaba stock offer? The company is latched onto some of the biggest technological trends in one of the world’s largest and fastest growing economies. E-commerce, cloud-computing and a number of other businesses under Alibaba’s umbrella continue to drive growth.
Analysts expect revenue of $72.4 billion for the year. If achieved, it will represent year-over-year growth of 29%. In the following year, consensus estimates call for $95 billion in revenue, as Alibaba approaches the $100 billion mark with robust growth.
For 2020, Street expectations call for earnings of $7.25 per share. Currently, that leaves Alibaba stock trading at 29 times this year’s earnings estimates. I continue to find Alibaba trading at a reasonable valuation, given that it has superior growth vs. many of the mega-cap tech stocks here in the U.S., yet a similar or better valuation.
That’s not to say it’s as well capitalized as Alphabet or Microsoft, just that its growth is so strong and its markets so deep, it’s hard to ignore Alibaba.
However, there is one red flag, and that’s the coronavirus. When a stock rallies in the face of perceivably bad news, it’s noteworthy — in a good way. However, we don’t see this type of event on the daily.
Supply chains have been disrupted across the board, and China hitting “pause” has an unknown impact on its economy at this point. While one would think online sales must be humming in China, hearing what management has to say first wouldn’t be the worst plan for investors. At a minimum, and particularly with volatility as high as it, bulls should consider a smaller position size until there is more clarity.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL and GOOGL.
