Buy Alibaba Stock and Look to the Future, Not the Past

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On April 12, Alibaba (NYSE:BABA) stock ripped higher by 9.3%. It was the stock’s best performance in months and finally gave investors something to cheer about. So, what got BABA stock moving in the right direction?

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It wasn’t better-than-expected guidance or a strong earnings report. In fact, it was a record fine from Chinese regulators.

The country handed down its largest antitrust fine yet, hitting up Alibaba for $2.75 billion or 4% of its 2019 revenue. However, the fine was not only lower than what investors had been fearing, it was dramatically lower than the maximum that regulators could have fined the company, at 10% of its revenue.

Moving Forward

Before the news of the fine, BABA stock was down 30% from its all-time high (set in October). At its low on Dec. 24, shares were down almost 34%.

The company has been under pressure for months now as investors worried about what antitrust measures may be heading its way. The stock was riding high into the fourth quarter in anticipation of the Ant Group IPO. Alibaba owns a one-third stake in Ant and was set to cash in as the latter went public. It was supposed to be a dual-listed debut in Beijing and Shanghai and make a historically large public debut.

Just days before the planned IPO though, regulators stepped in and ultimately forced Ant to nix its IPO plans. From there, reports and news of China’s stance toward Alibaba worried investors, enough so that the stock was a major laggard versus other large- and mega-cap tech stocks.

However, here’s the bottom line: Although Alibaba is absorbing a record fine, $2.75 billion is nothing these days for big tech. The company has already said the fine won’t have a material impact and the hope is that it can allow everyone — investors, management and regulators — to move forward.

When it comes to investing, investors focus on where the company is going. They don’t necessarily care about the fine, they care about moving past that negative headwind and focusing on all the things Alibaba is doing right, for which there are plenty.

Breaking Down Alibaba

I love Alibaba because it’s a conglomerate. It’s known for its e-commerce presence, but it also has a growing cloud business. Does that ring any bells, sort of like Amazon (NASDAQ:AMZN) several years ago?

It’s obviously not a clone of the Amazon situation, but it’s at least reminiscent. Further, Alibaba has so many positives going for it.

It dominates e-commerce in China, a country with a population of 1.4 billion people and a middle class that’s larger than the entire U.S. population.

Further, it owns the most popular e-commerce sites in the country, that being Tmall, Taobao and of course, Alibaba. Tmall is the third-most popular website in the world, while Taobao sits at No. 8. So, I mean it when I tote Alibaba’s online presence.

Obviously, Wall Street understands the potential with these assets too, with consensus estimates calling for 39% revenue growth this year. That’s followed by 31% growth estimates in 2022. Earnings estimates call for 24% growth this year before a deceleration to just 10% growth next year.

However, I wouldn’t be surprised if next year’s numbers are too low.

Despite the solid growth, great assets and hopefully putting the antitrust concerns behind it, the most attractive thing about BABA stock may be its valuation.

Trading at 24x this year’s earnings, I feel that’s underpricing the business based on the above catalysts. Should Alibaba find its way back into the market’s good graces, $300-plus isn’t out of the question.

Trading BABA Stock

A look at the charts paints a somewhat mixed picture for BABA stock. On the one hand, the near-10% pop we saw on April 13 elevated the stock over several key moving averages and off the recent lows.

On the other hand, we haven’t seen much follow through, with shares down since the rally.

While BABA stock couldn’t hold up over the March high, or the 50-day and 100-day moving averages, it is trying to hold up over that resistance zone between $237.50 and $240. It’s also holding up over the 10-week moving average.

I would love to see Alibaba hold up over the 10-week and 10-day moving averages. If it can’t, it’s possible it goes down to fill the gap from April 14. On the upside, clearing the 100-day moving average could really open up some upside.

On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.