Alibaba Group Holding Ltd (BABA)

[FUNMAN]

Alibaba's Stock May Fail To Advance In The Weeks Ahead

Feb. 01, 2021 1:17 PM ET
Alibaba Group Holding Limited (BABA)

Read the article at this link to see all of the charts:

https://seekingalpha.com/article/4402484-alibabas-stock-may-fail-to-advance-in-weeks-ahead

Summary

* Alibaba is due to report results on Feb. 2.

* The stock appears cheap when adjusting for growth and historical trends.

* However, there has been some bearish options betting in recent days.


Alibaba (NYSE:BABA) is due to report results Tuesday morning. The result may not come at a more critical time for the company as investors eagerly await what the company has to say. After all, the last few months have been very eventful for the company, with the shares falling 20% since peaking in late October. Analysts estimate third quarter earnings at $3.24 per share, and revenue of $33.1 billion.

The stock has come under fire recently as the Chinese communist party has taken aim at Jack Ma after he made some undesirable comments in October. It has resulted in the party shelving the IPO of ANT Financial, a business that Alibaba has a big stake in. It was then, in late December the party launched an anti-monopoly investigation.

Stocks Trade At A Historical Discount

The stock is certainly cheap based on a historical basis. Trading for 20.5 times next year's earnings estimates of $12.39 per share. That's well below the historical average of 23.4 over the past five years. The current political risks appear to be the contributing factor behind the stock depressed earnings multiple.

In fact, the growth rate of the earnings even suggests the stock may currently be undervalued, with earnings seen rising by 39.5% in fiscal 2021 and by a compounded annual growth rate of 27.7% through 2023. It gives the stock a three-year growth adjusted PEG ratio of less than 1, at 0.75.

Even revenue is expected to grow quickly, rising by 52.2% to $108.8 billion this year, and a compounded annual growth rate through 2023 of 33.7%. Despite the stock's struggles, growth for the business is expected to be rather healthy.

Bearish Options Betting

However, someone was placing bearish options bets ahead of the earnings report. The trader appears to be betting that the stock falls over the next few weeks following the quarterly results. The open interest for the $250 February 19 puts have seen their open interest rise by around 11,300 contracts. The data shows the puts were bought for between $6 and $7 per contract between January 20 and 25. It would indicate that the stock is trading below $243 by the expiration date or lower, a decline of around 5.5%.

Technical Trends

Technically, the stock has struggled around $268, but a breakout above $268 could likely send the stock higher towards $280. However, that seems less likely. We can see volume levels have started to really dry up at these higher prices, suggesting that buying interest is not as strong for the stock at current prices.

Overall, the RSI has been trending lower since the middle of September, suggesting that the bullish momentum has been slowly fading, and that equity is likely to continue to head lower. Should a move lower occur as some of the trends suggest it seems likely to result in the shares falling back to support and the trend line perhaps to as low as $211.

Overall, Alibaba's business based on estimates appears to be healthy. But the stock seems to reflect many of the risks that come from the recent round of negative headlines. Ultimately, where the stock goes will be dependent on whether those headlines become a distant memory or grow more intense.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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