On May 20, Alibaba (NYSE:BABA) stock made a recent high at $221.16. Now it is hovering around $200. The recent decline in BABA stock came at the back of the quarterly earnings as well as increasing tensions between the U.S. and China.
As we get ready to start June, should investors see the lower Alibaba stock price as a buying opportunity? I believe there may be further volatility with a downward bias ahead.
Long-term investors with a two- to three-year time horizon may consider buying the dips, especially if the price declines below $190. Here’s why.
A Look at Alibaba’s Earnings
Over its 20-year history, Alibaba has expanded from a single e-commerce sales platform into a multinational technology company. It currently specializes in a wide range of areas spanning from e-commerce to retail, cloud operations, technology and fintech. It has become a compelling growth story in China’s economic and technological development.
On May 22, the group announced financial results for the quarter and fiscal year ended March 31. Revenue for its fiscal fourth quarter increased 22% to $16.1 billion, beating analysts’ forecasts. Management also said that it was seeing a “steady recovery since March.”
In the report, investors paid attention to three main segments:
- Core commerce (BABA’s largest segment).
- Cloud computing (revenue soared 58% year over year in the quarter).
- Digital media and entertainment (revenue increased 5% from the previous year).
Alibaba’s business segments extend into both online and physical retail, apps, digital media and entertainment, and increasingly the cloud. It is best known for its e-commerce platforms, including T-Mall and Taobao. In cloud computing, it is now the market leader in Asia.
Put another way, it has become a Chinese conglomerate. Despite the Covid-19 outbreak disrupting many businesses around the world, Alibaba’s management also issued a bullish outlook for 2021.
Increased U.S.-China Tensions
The trade war between the U.S. and China developed throughout 2018 and 2019. Like many Chinese stocks, Alibaba stock was quite volatile at the time. Still, BABA stock moved from the $130 level in 2018 to hit an all-time high of $231.14 in January 2020.
But then the novel coronavirus outbreak started and many countries went into lockdown. President Donald Trump has also been vocal in pointing the finger on China for not warning the global community about the virus early on.
And last week the U.S. Senate approved a bill that could potentially lead to several Chinese companies delisting from U.S. stock exchanges. In addition to other requirements, the legislation asks foreign firms to disclose if they are owned or controlled by foreign governments.
Although the bill applies to all foreign corporations, its main target is Chinese businesses.
InvestorPlace readers will be familiar the current controversy surrounding Luckin Coffee (NASDAQ:LK) stock. Many questions as to how business was conducted and financial results were reported seem to have been an impetus for the bill to pass.
So, can this bill lead to a delisting of Alibaba stock in the U.S.? I don’t believe so. Alibaba went public in the U.S. in September 2014. Over a year ago, CNBC host Jim Cramer has indicated Alibaba stock would be the one to buy if investors wanted to buy Chinese stocks.
And given the group’s growth prospects, many investors may agree with him. For example, in the U.S. it has an increasing presence as a wide range of merchants stateside list on its platform.
Management has confirmed that the group prepares and presents financial statements in accordance with U.S. accounting standards.
The U.S.-China relationship seems more fragile than even before. On the other hand, in the long run BABA stock may even benefit from the changing listing requirements. As bad apples that may give Chinese stocks a questionable name increasingly cannot list in the U.S., Alibaba may come to represent a stable way to buy into the Chinese economic story.
Recent Price Action of Alibaba Stock
BABA shares started 2020 just over $216. And in January, they hit an all-time high of $231.14. As markets went on a downward spiral in March, it hit a recent low of $169.95.
Therefore, when Alibaba stock went over $220 last week, it had rallied about 30% from its recent lows. Put another way, some profit-taking was to be expected.
Are you an investor who also follows technical charts? Then you may be interested to know that BABA stock charts suggest the fall may continue in the coming days, possibly toward the $190 level where there is considerable support.
If you are a potential investor, you may want to buy the dips. And if you currently own Alibaba stock, you may consider riding the wave.
Alternatively, you may consider initiating an ATM covered call position. For example, a July 17-expiry covered call would decrease the volatility in your portfolio, offer some downside protection and also enable you to participate in a potential up move.
Investor Takeaway on Alibaba Stock
Recent earnings release from Alibaba showed that the group’s growth in likely to continue in coming quarters, too. Therefore, long-term investors may view any further decline in Alibaba stock as a good opportunity to buy into the shares.
However, traders with a short-term horizon should remember that there might be further choppiness and even profit-taking in BABA stock. The daily volatility of the stock is high, giving it a wide trading range. Short-term traders should proceed with caution.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.