Alibaba Is a Finally a Buy After Prolonged Correction

Shares of Alibaba (NYSE:BABA) look to have finally found some footing after a serious selloff. BABA stock has now fallen more than 35% from the all-time highs of $317.14 reached last October.

Alibaba Stock
Source: Nopparat Khokthong / Shutterstock.com

Certainly some of the correction was warranted given the steep run-up. The latest drop, though, has come too far, too fast. Time to be a buyer of BABA on any further weakness.

Alibaba reported earnings last Thursday. InvestorPlace Web Editor Nick Clarkson took a close look at the release, which was a mixed bag.

BABA Stock Numbers

EPS, adjusted to a one-time charge, was $1.58 versus expectations of $1.78. Revenues were $28.6 billion compared to analysts consensus of $28.06 billion. So a miss on the bottom line with a beat on the top line.

BABA stock took a hit post-earnings with shares dropping more than 6%.

Combined earnings over the past four quarters have come in pretty much in line. In that same time frame, however, BABA stock has fallen 20%. The deterioration in the stock price combined with flat earnings makes for lower, and more attractive, price multiple.

The current P/E for Alibaba now sits at 24.46, near the lowest level of 23.29 in the past 12 months. The previous times BABA was this cheap was July 1, 2020. The ensuing rally took the stock to the all-time highs at $319.32 over the following four months.

Comparison With Amazon

BABA stock is looking cheap on a comparative basis as well. Normally BABA is fairly well correlated to the price of Amazon (NASDAQ:AMZN). This makes intuitive sense since Alibaba is sometimes referred to as the Amazon of China. Mark Hake CFA recently wrote a well-researched article on InvestorPlace comparing Alibaba to Amazon on a valuation basis. He has a $345.88 price target on BABA stock.

Lately, however, that correlation has broken down considerably. Amazon stock has traded sideways since last December while BABA stock has dropped more than 70 points.

One year comparative chart BABA-AMZN

Source: The thinkorswim® platform from TD Ameritrade

I expect BABA to close the correlation gap and be a relative out-performer to AMZN over the coming weeks. This adds to my bullish thesis on Alibaba given that I just wrote about why  I like AMZN stock near current levels.

Technical Take on BABA Stock

The 9-day RSI went below 20 but has subsequently strengthened. MACD is also at extremely oversold levels but has firmed. BABA stock is trading at a big discount to the 20-day moving average. The previous times these indicators aligned in a similar fashion marked significant short-term lows in Alibaba.

 

BABA stock 2 year price chart

Source: The thinkorswim® platform from TD Ameritrade

There is major horizontal, and psychological, support at the $200 level. More importantly, BABA stock tried but failed to make a new low on Friday. Shares ultimately reversed course to close higher on the day.

This type of reversal pattern is many times a sign the sellers have become exhausted and the buyers resumed control. It is especially powerful given that it took place near major support and following such a significant selloff.

It is costly to buy BABA stock outright at current levels. Just 100 shares would cost about $21,000. The options market, however, provides a way to be a buyer at even lower levels while collecting premium up front. So to position to go long BABA stock at a discount, a bullish out-of-the money put spread makes probabilistic sense.

How to Trade it

Sell BABA July $185/$180 put spread for a 75 cents net credit

Maximum gain on the trade is the net credit received of $75 per spread. Maximum risk is $425 per spread. Return on risk is 17.65%. The short $185 strike provides a $24.51 downside cushion to the $209.51 closing price of BABA stock.

Earnings aren’t until mid-August, which eliminates any earnings related risk.

On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Anyone interested in finding out more about option-based strategies or for a weekly option and volatility newsletter can visit the Options and Volatility Newsletter website.


Article printed from InvestorPlace Media, https://investorplace.com/2021/05/baba-stock-alibaba-finally-a-buy-after-selloff/.

©2021 InvestorPlace Media, LLC