Last month, Alibaba.com expanded into the United States when Alibaba Group opened its business-to-business online marketplace to US companies and will allow US manufacturers, distributors and wholesalers to sell their products. The size of the B2B market is more than five times that of online retail at $23.9 trillion.
Trade war tensions can certainly put Alibaba’s global ambition and stock gains in question. Alibaba Cloud is one segment that will continue its growth despite fluctuating trade war news. China’s IaaS market was worth $1.2 billion in 2018 compared to the United States at $40 billion. One day, Alibaba’s cloud profits will surpass e-commerce profits, which is not a bold claim as this is what happened with Amazon with $25.7 billion in revenue last year with AWS reporting $7.3 billion in operating income compared to Amazon North America reporting $7.27 billion.
Alibaba’s margins are slimmer than Wall Street would like to see due to investments in cloud services and other areas, but overall, Wall Street has a Strong Buy on BABA with a low 12-month estimate of $195 and a high estimate of $280 with average price target of $218. The stock has underperformed the S&P 500 with -10% returns over the past 12 months. Due to the market shedding over 500 points today, Alibaba is trading below its 200-day moving average and 50-day moving average.
There’s a high probability that Alibaba beats earnings when it reports before market open tomorrow .A few other points adding to the higher probability:
- Alibaba’s last earnings report beat by $0.33 and GAAP EPS beat of $1.47 beat by $0.96
- Revenue last quarter grew 51% YoY or 39% excluding acquired businesses
- Revenue of $13.93B beat by $600M last quarter
- com had strong earnings, giving us a small glimpse into China’s e-commerce market last quarter
- According to MarketWatch, analysts surveyed by FactSet expect that Alibaba earned 10.32 Renminbi a share for the June quarter, or $1.46, up from 8.04 RMB, or $1.17 a share, in the year-earlier period.
I am personally buying a call before earnings and will build a larger position if BABA pulls back per Knox’s technical analysis below. This way, I stand to gain no matter what happens tomorrow and regardless of what the market decides to do over the next few months.
Note: I plan to dedicate a full research report to this stock as there are a few more positives to consider for building long-term positions.
Alibaba Technicals:
Technical analysis provided by Knox Ridley.
Relative Strength Index: RSI trends in red (bearish internals), yellow (neutral internals), green (bullish internals). Alibaba, on its most recent move, broke 60 and reversed back into red. This can change quickly, but Alibaba is currently showing weak buying pressure. Alibaba broke it’s RSI trendline from green to red mid-2019 and has struggled to regain green territory.
BABA is trading on its 200-day Simple Average after testing many times since mid-2018. It’s currently at an inflection point and trading within a wedge pattern, which is highlighted in blue.
The wedge pattern is a trading range that comes to a point, that forces the price action to trade in a very narrow band and builds momentum for a break-out or a break-down. Fundamentals are strong while broader market is weak, and therefore, we have two scenarios for you and will be watching the $148 support and the $180 resistance.
Scenario 1: BABA has traded along the blue trendline for many years and this has been major support. If BABA breaks down below this long term trendline, which coincides with the bottom of the wedge, then we will test the $148 support and this is a warning sign (and a gift). If this breaks, we will update you on entry for a bigger position.
Scenario 2: BABA reports strong earnings and continues along the blue trend line or breaks above the wedge and reaches the $180 resistance. If you like this scenario, consider buying an out of the money call.