Alibaba Group Holding Ltd – Why BABA Stock Has 20% More Upside

Alibaba Group Holding Ltd (NYSE:BABA) is making waves once again. The stock was stuck in a rut for almost the entirety of the second quarter, but recently reported fiscal first-quarter results have sent Alibaba stock off to the races again.

Alibaba stock BABA

Alibaba is, in a way, China’s version of Amazon.com, Inc. (NASDAQ:AMZN). While its business model is different, Alibaba is an e-commerce giant that provides consumers with a convenient place to buy the goods that they already purchase every day. BABA not only sells to Chinese citizens, but also to millions of buyers and supplies all around the world.

Alibaba has experienced strong growth in the past, and Thursday’s fiscal first-quarter results kept that trend going. Earnings of 74 cents per share easily beat estimates of 63 cents per share. Revenue surged 59% to $4.84 billion, which also was well above expectations. An increase in transactions done on mobile devices was another bright spot in the quarter.

What really stood out was the growth in Alibaba Cloud, China’s largest cloud computing services provider. This area makes up just a small portion of the company’s total revenue (3%), but its sales saw a 156% increase to $188 million in the first quarter. Alibaba Cloud is expected to grow 112% annually, according to Oppenheimer. That would increase the division’s revenue contribution to 18% of BABA’s total result by 2020.

The cloud has been a huge boon to large U.S. companies like Amazon and Microsoft Corporation (NASDAQ:MSFT), with the former really taking advantage with its Amazon Web Services. While Alibaba may have a difficult time gaining significant market share in the country, I suspect it will still reap solid rewards given its hometown advantage in China, where the cloud phenomenon remains in the early stages.

Alibaba Stock Chart at a Glance

Alibaba BABA stock chart

BABA shares have surged since the earnings report. Looking at the chart above, you can see that the stock broke through a major triple-top resistance at $86.40. While Thursday’s momentum was impressive, I was pleased to see the big-volume rally continue on Friday, as it suggests this was not simply a one-time blow-off top.

Instead, this move has legs.

From here, the next area of resistance is just above current prices at the May 2015 high of $95.06. As a result, we may see some near-term push back in the shares. But in the end, I expect Alibaba stock to break out and test the all-time high of $120 by the end of the year.

I think Alibaba still has a lot of potential in it, and if you’re looking to ride the wave, I’d recommend looking for some weakness around the $90 area to buy into in the coming weeks.

Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks and the ETF Bulletin. Earlier this year, Matt and Hilary Kramer teamed up on Breakout Stocks where Matt serves as the Co-Editor. Most recently, Matt and Hilary joined forces again. This time, they are helping individual investors make money trading ETFs. For more on their latest project, visit www.etfedgesummit.com.

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