Alibaba (NYSE:BABA) stock has had a couple of green ticks lately, but that can’t mask how bad BABA stock has behaved this year.
The sad part is that it’s through no fault of its own. The company is still strong, but it’s under harsh political pressures. The thesis today is that this too shall eventually abate, and investors will give it respect again.
To complicate matters further, the headlines this week are creating overall jitters on Wall Street. We have a thousand cuts bleeding equity markets alive. Nothing has changed in the fundamentals, but fears of a generational top are creeping in. There’s no shortage of headlines ranging from Federal Reserve talks to shortage of gasoline in England.
Quite frankly, it’s like investors are grabbing for things to fear in the absence of one major problem.
The charts still suggest that the buyers are in charge in the long term. Monday of last week was horrendous, and yesterday we successfully tested those levels. It is encouraging to see BABA stock be green on a very red day. On Tuesday, the S&P 500 fell 2% while BABA rallied almost 1%.
Perhaps it has lost enough weight that it has very little fat to shed further.
Light at the End of the Tunnel for BABA Stock
This alone is not reason to load up with an all-in position. We don’t know what the Chinese government still has in store for it. The trigger for this assault on successful businesses may have been comments from co-founder Jack Ma. But, regardless, maybe this campaign was already in the works.
Alibaba’s fundamental statistics are beyond reproach; they tell a great story. In four years, Alibaba tripled its top line and more than doubled its bottom line. These are outstanding results with no apparent systemic issues.
I worry about the upcoming 11/11 event, because if it’s very successful, there could be more regulatory focus on the company. What if Alibaba’s management decides to tone it down, or worse, cancel it? There’s nothing to that effect yet, but it’s important to consider all potential pitfalls regardless of how unlikely they are.
The BABA stock chart offers more potential good news. After a 54% correction, it has fallen back into the lows of December 2018. Ironically, during that month the U.S. Federal Reserve turned on the quantitative easing (QE) spigot. Last week, Fed Chair Jerome Powell signaled that it will turn off QE by mid 2022.
Technical and Fundamental Arguments
In conclusion, from a technical and a fundamental perspective it is hard to panic out of BABA stock now. The upside potential outweighs the downside risks from here. If the stock market is higher in the future, then this one is one of the leaders.
Meanwhile, there are short-term levels to hold. Losing this week’s lows would bring the 2018 bottom back in focus. Therefore, below $144 per share, BABA stock is in danger of falling another 10% from there. Coincidentally, that zone has served as the basis for the 65% 2017 rally.
Management is executing well enough to deliver the growth that Wall Street expects. Very few companies have the earnings power they do. During last year’s Nov. 11 event the company generated more than $70 billion in revenues. In a year, Alibaba creates $34 billion in cash from operations. Its price-to-earnings ratio is now only 32% of what it was in 2017. BABA is now 30% cheaper than Apple (NASDAQ:AAPL).
If the equity markets continue to be bullish, this one is on sale for a song.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.
