Where Is Alibaba Stock Headed?

In August 2014, financial sites were flooded with news about Alibaba (BABA), the Chinese online marketplace whose IPO turned out to be the biggest in history. It got a little crazy, frankly, with endless commentators analyzing fundamentals, market penetration, leadership, strategies, threats, competition and everything else imaginable about Alibaba. Founder Jack Ma became a familiar face, even for people who weren’t hanging around the business end of news sites.

BABA stock seemed to get into the spirit of the occasion, coming public at 68 at its IPO in November, then trading up to 100 almost immediately. Then, after a few weeks of profit-taking, BABA ripped as high as 120 in November. It was everything investors hoped it would be.

Then the wheels came off, and Alibaba stock headed south, ducking decisively below 100 in January 2015, and kept declining. BABA tried to put in a bottom from March through May, finding support at 81–82 and even making a little run back into the 90s in May. Then came another downleg that dragged the stock to 57 in September.

At that point, with the stock trading below its IPO price, the stage was set for a bounce, and BABA obliged, rallying for five weeks only to run into resistance at 85 that put a brick on its head until the end of 2015.

And then came January 2016, when stocks of all kinds sold off and BABA fell to 59—probably knocking out many of the diehard holders from the stock’s triple digit days—probably clearing the way for the most recent rally. BABA is now trading above 75 despite a recent downgrade of the stock by Deutsche Bank.
That’s a lot of eventful history for a stock that’s just been trading on U.S. exchanges for a little over a year and a half.

So, where is Alibaba stock headed? Well, let’s look at the situation from a fundamental point of view. Alibaba just passed 3 billion yuan in gross merchandise volume (GMV) (that’s about $463 billion), which is a 200% increase since the company hit the one-billion-yuan milestone in 2012. That means the company has averaged 50% GMV for four years, and that’s a benchmark that very few companies can match.

Alibaba has an astounding $18.6 billion in total cash, which will allow the company to continue its program of acquisitions, investments and collaborations. Like Amazon, Alibaba has made a major move toward becoming a player in cloud services. It’s also using its huge online footprint to morph away from its original character as “the eBay of China,” to acquire aspects of Groupon (GRPN), PayPal (PYPL) and Google (GOOGL) in the still-growing, mobile-driven world of the Chinese Internet

In its latest quarterly results, Alibaba reported 26% revenue growth, 16% earnings growth (like Amazon, a large chunk of the company’s free cash flow has been going into infrastructure investments and new business projects), and a whopping 47.5% after-tax profit margin. And with all this, the stock’s P/E is a reasonable 28.

Part of BABA stock’s problem comes from the emerging markets definition. Countries are designated as “emerging” when they are growing rapidly, but are not fully industrialized, when capital flows and businesses are subject to interference from governments, inhibiting market efficiency.

The bottom line is that emerging markets stocks are riskier than developed markets, which makes them more volatile. When investors get nervous, emerging markets are likely to correct more sharply than developed ones.

And you can see that volatility in the chart. Here’s a weekly chart of BABA stock that covers its entire history. You can see everything here, from the IPO stampede to the attempted base in the 80s (and how that base in the 80s becomes resistance in November and December) and the stock’s double bottom in September and early February.

Where is Alibaba stock heading? Well, it’s one of the healthiest companies I know of, even if it did irritate the Chinese government a little last week by allowing an editorial critical of Xi Jin Ping to be published. But these things happen, and even a spate of news stories about Alibaba’s counterfeit merchandise problem in state media is unlikely to have a lasting effect.

If I were a potential investor in BABA stock, I’d be watching that old resistance/support level in the 80s. If the stock can get past that barrier, I’d say the coast is clear. A story this strong, supported by extremely robust fundamentals, just needs the okay from its stock chart to take off again.

Fortune Cookie

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here. 

Tim’s comment: A few centuries later, another smart man, Richard P. Feynman, said, “The first principle is that you must not fool yourself and you are the easiest person to fool.” These are valuable warnings in connection with any endeavor, not least of them investing. So take care not to fool yourself; take a good hard look at the data—regularly—and interpret it as honesty as possible.

Paul’s comment: This harks back to my favorite bumper sticker, which is: “Don’t believe everything you think.” The market is very good at telling you when you’re wrong about something. It will grade your grasp on reality by either slapping the fool out of your portfolio or giving you a profit. If you’re willing to learn, the market is ready to teach.


Paul Goodwin
Chief Analyst, Cabot Emerging Markets Report


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