What happened to Alibaba (NYSE:BABA) stock is a perfect example why companies should stay out of the political realm. Its earnings power has no equal – not even from Apple (NASDAQ:AAPL). Last year, they generated $75 billion in revenues in one day. Clearly the company has potential. But NIO stock has suffered for the last six months.
The political trouble started last year with antagonistic remarks from company co-founder Jack Ma. He brought the heat onto him and the company from the Chinese government. Officials responded to his criticism by lashing out at the company and Mr. Ma. Most notably, they canceled the IPO of Ant Financial, which meant that Alibaba missed out on a large payday. They didn’t stop there, expanding the penalty reach in all kinds of directions even including taxes.
The bottom line, Jack Ma stirred a hornets’ nest and BABA stock suffered the stings.
Things for investors got worse after the November earnings report. The numbers were fine but sentiment had already soured. There was no appeasing them, and attempts to catch the falling knives ended in tears. By December, BABA stock had erased the entire 2020 summer rally.
BABA Stock Is Cheap
Headlines aside, and if we can ignore its political trouble, the stock is a bargain. It is aggressively growing its revenues and reducing debt ratios. Cash flow from operations is huge. This means that they can finance their own growth. It has a P/E of 27 and a price-to-sales of 6.7. This is cheaper than Apple – and it grows way faster. Therefore, the fundamentals are not the reason the stock is falling. This is proof that it’s a broken stock, not a broken company.
Being cheap hasn’t stopped it from falling, and it has failed to sustain rallies. BABA is trading inside a tough range. There is massive support below and tough resistance above. The energy in it is building and the breakout from the range is going to be violent. If the markets hold up, I favor a rally over a crash out of the range.
If I am right, it will rally back to $270 per share or higher. The hurdle lies at $245 where there will be sellers. But if the bulls can overcome that, they can trigger a bullish pattern. This would invite momentum buyers who like to buy high and sell higher.
But conversely, if they lose the recent lows they risk falling below $200 per share. If and when that happens, it would make for a bargain entry point for such a great business model. Even when I was expecting a recovery last year I identified this current level as important. I stand by its supportive qualities still.
Use Better Tools
Those who know how to use options can start the process of owning it cheaper now. By selling puts in it, I can be bullish BABA stock now while leaving room for error.
For example, an investor can sell the BABA July $195 put and collect more than $3 for it. This trade does not need a rally to profit. In fact, the stock can fall another 16% and it would still break even. It is true that they don’t ring bells to announce perfect entry spots. But this strategy eliminates the need for finding surgical entry points.
The extra caution is necessary because there is extrinsic risk this week in the markets. For the last two days, the bull sentiment is a bit wobbly. We are approaching an important jobs report this Friday. If it shows another strong scorecard it may rattle markets further. Last week, the Federal Reserve Chairman Powell isolated unemployment as the excuse for his extremely loose monetary conditions. We’ve already had one strong report last month, if we get another then his argument weakens.
Wall Street is smart and they will price things way ahead of time. They know that two strong reports is potentially a trend and they will react quickly. In other words, the Fed may need to taper sooner than their 2023 forecast.
This is all to say that markets can still fall this week. If so, they will drag BABA stock along through no fault of its own.
I am 1-and-1 in my two last attempts to catch this Jack Ma falling knife. That’s reason enough for me to doubt any decision I make about it today. It would be wise to keep the position size small just in case. The markets are still near all-time highs and this is nowhere near being “the” bottom.
To really appreciate this statement, pull up a weekly chart on the S&P 500. It is still in the stratosphere on a trend basis.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.