Sellers were in Alibaba stock Tuesday morning as Wall Street weighed its latest earnings report. Alibaba (BABA) has rallied nicely off lows after falling 34% off its high, and Alibaba continues to hold above its 50-day moving average, but is BABA stock a buy right now?
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Revenue for Alibaba’s core commerce segment, which includes its Tmall and Taobao marketplaces, rose to 195.54 billion yuan, up 38%. Cloud computing revenue for Alibaba’s fiscal third quarter came in at 16.11 billion yuan, up 50%.
“Our cloud computing business continues to expand market leadership and show strong growth, reflecting the massive potential of China’s nascent cloud computing market as well as our years of investment in technology,” Alibaba CEO Daniel Zhang said in a press release.
Sellers Hit BABA Stock
Sellers were in Alibaba stock on Nov. 3 after the $34.5 billion Ant Group IPO was suspended in Shanghai and Hong Kong. The decision to suspend the IPO came after Shanghai exchange officials said it would halt the listing due to the company’s inability to fulfill conditions amid changes in the regulatory environment.
Sellers were in Alibaba stock again on Nov. 5 after the company reported earnings and missed on sales.
BABA stock crashed another 8% on Nov. 10 after Chinese regulators announced new draft antimonopoly rules for China online platforms like Alibaba and JD.com (JD), among others. It’s had a hard time attracting buyers since then.
Alibaba stock sold off sharply on Dec. 24 on news the Chinese government launched an anti-monopoly probe into the e-commerce giant. But shares rallied sharply on Dec. 29 on news progress is being made to overhaul the operations of Ant Group into a financial holding company. Ant Group is the fintech arm of Alibaba. Ant Group operates a suite of financial products, including the widely used Alipay digital wallet in China.
Alibaba Stock Fundamental Analysis
When it comes to liquid, megacap stocks in China, it’s hard to find a more compelling name in terms of fundamentals than Alibaba. The stock has been a big winner since its IPO in September 2014.
Expectations were high for Alibaba’s Singles Day annual shopping event in November, and the company didn’t disappoint as sales nearly doubled from the year-ago period to $74 billion.
The company has been able to stay in growth mode despite a slowdown in its core e-commerce business.
Alibaba’s business in China looks a lot like Amazon’s in the U.S. Alibaba’s cloud-computing business is showing solid growth, just like Amazon’s booming web services business.
Alibaba also sees dollar signs in food delivery. In 2018, it merged its food delivery service Ele.me with its lifestyle app Koubei to better compete with Tencent (TCEHY)-owned Meituan.
Sales at Alibaba’s digital media and entertainment unit are also rising. The unit includes Alibaba’s videostreaming platform Youku, along with its music streaming service, Xiami. Alibaba also has a licensing agreement with Walt Disney (DIS) unit Buena Vista International, giving it access to a large amount of Disney content.
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And just like Amazon, Alibaba sees potential in the sports streaming market. In 2018, the company partnered with China Central Television and streamed all matches of the 2018 FIFA World Cup. Alibaba said the World Cup, as well as continued investment in original content, fueled daily average subscriber growth of 200% for Youku.
Top-Rated Stock
Alibaba’s Composite Rating of 92 (scale of 1-99 with 99 being the best) is helped by strong earnings and sales growth in recent quarters along with excellent 12-month price performance.
For a megacap stock, Alibaba continues to deliver torrid growth. But earnings and sales growth slowed dramatically in May, hurt by the coronavirus outbreak. Adjusted profit inched up 2% year over year to $1.30 a share. But that was well above the consensus estimate of 85 cents. Revenue increased 16% to just over $16.14 billion, also above expectations of $15.1 billion.
The company on August 20 reported a 15% rise in quarterly profit. Sales increased 30% to $21.76 billion.
Alibaba breaks down its revenue into four segments: Core Commerce, Cloud Computing, Digital Media and Entertainment and Innovation Initiatives. Core commerce revenue jumped 34% to $18.9 billion. Cloud computing revenue increased 59% to $1.75 billion, accounting for the lion’s share of total revenue.
Mobile monthly active users totaled 874 million, up 15.8% from the year-ago quarter and 3.3% sequentially.
Top Fundamentals
Annual return on equity of 21% and pretax margin of 31.3% help its top-notch SMR Rating (sales + margins + return on equity) of A from IBD Stock Checkup. With Stock Checkup, you can easily see who the group leaders are based on a combination of fundamental and technical factors.
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For its current fiscal year 2021, earnings per share are expected to jump 37%, with 20% growth seen in fiscal 2022.
Etsy (ETSY) is a top-rated stock in IBD’s internet retail group, according to IBD Stock Checkup, along with China-based JD.com (JD), Vipshop (VIPS) and eBay (EBAY).
Alibaba Stock Technical Analysis
After a heavy volume breakout for Alibaba stock in late November 2019, the coronavirus stock market crash brought sellers into the stock. Alibaba, a member of IBD’s Long-Term Leaders portfolio, soared out of a 24-week consolidation in July.
A 36% pullback for Alibaba stock in the second half of 2018 shook out a lot of sellers in the stock and ultimately served to reset the base count.
Alibaba broke out of a flat base with a 268.10 buy point during the week ended Aug. 28. It rallied for a bit, then started to pull back with the broad market. A new flat base formed with a 299.10 buy point, although an early entry was seen when Alibaba stock gapped up on Sept. 30.
Improving RS Line
Alibaba’s relative strength line is starting to point higher after a nice rally off lows. A stock’s relative strength line, found in daily and weekly charts at investors.com, compares the stock’s daily price performance to the S&P 500. An upward-sloping RS line means the stock is outperforming the S&P 500. A downward-sloping line means the stock is lagging the S&P 500.
The bottom line: With Alibaba stock still far off its high, it still has overhead supply to work through. But aggressive investors might opt to buy if BABA stock gaps up on earnings. If it does, watch for Alibaba to hold gains. Sometimes, stocks gap up on earning but aren’t able to hold gains. Look at what Skyworks (SWKS) did on Jan. 29.
Risk averse investors will wait and see if Alibaba can fully form the right side of a base. If it does, a breakout to new highs isn’t out of the question.
Follow Ken Shreve on Twitter at @IBD_KShreve for more market insight and analysis
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