- BABA stock is still struggling with uncertainty.
- The Chinese retail giant shows strong results but is it trying to catch a falling knife.
- Fundamentals still strong and technical analysis hints at bullish formation.
Alibaba (BABA) is the Chinese Amazon but has been in the news for all the wrong reasons of late. Just in case you are back from a trip to Mars, here is a brief recap of this ongoing saga.
Update: Alibaba (NYSE: BABA) is rising by some 3% on Thursday after the retail behemoth announced it is expanding its offering – launching an electric sedan in collaboration with SAIC Motor, China's largest automaker. The IM acronym is short for "intelligence in motion" and perhaps founder Jack Ma is showing wisdom by collaborating with a state-owned firm. SIAC Motor is controlled by the government, and Shanghai Zhangjiang Hi-Tech Park Development is also involved in the project. Critics of Alibab said it is too focused on its consumer-focused websites, failing to expand into new venture and offer growth prospects for investors.
BABA is one of China’s most successful internet companies, has a similar business model to Amazon with an online retail marketplace, a cloud business and a fintech e-payments business called ANT Group. ANT Group was due to be offered in late 2020 but was pulled at the last minute after BABA and ANT founder Jack Ma gave a speech in which he criticised Chinese regulators and banking industry. The IPO (Initial Public Offering) was cancelled and BABA share price has cratered since, losing over 30% from its highs.
Confusion reigns around BABA
BABA has been one of the most talked-about stocks over the last few weeks on internet chat boards and among the institutional and hedge fund communities as all market players try to get a grip on what is happening. Jack Ma has not made any statements since that infamous October criticism, BABA is still under investigation from Chinese regulators and the US administration has been delisting certain Chinese stocks. All of this has helped fuel investor uncertainty and the market always hates uncertainty. The stock understandably has fallen.
Positive BABA steps
The Chinese government has too much to lose by breaking up BABA or letting it fail. The Chinese Communist Party (CCP) has in recent years embraced capitalism on its own terms and opened up the country to foreign investors. A look at the investor profile of BABA shows a multitude of large institutional investors such as Softbank, Blackrock, Vanguard, T Rowe Price, State Street, JP Morgan, Schroeder's, etc. These are huge global investors holding a huge share of the global equity market. Blackrock is the largest fund manager in the world and has a shareholding in every global publicly-listed company.
To isolate the global investment community would be a hugely negative action for China with huge repercussions for its economy, it is not going to happen. China is currently the second-largest economy in the world with its target set to take the number one spot in the next few years. The CCP wants to maintain this economic powerhouse story, but on its own terms. It cannot afford to isolate the global investment community.
Strong recent results
Alibaba recently announced second-quarter results for the year with 30% revenue growth, cash flow up 15% and BABA cloud business previously mentioned for IBM has increased its revenue by 60%. BABA expects near 40% growth in earnings for FY2021 and EPS (Earnings per Share) estimate for 2022 was increased from $11.68 to $12.45. BABA, like Amazon (AMZN), is well-diversified across multiple sectors and the US-China political backdrop should improve with President Biden.
The company is comparable to Amazon but trades at a marked discount now. Its P/E (Price-to-Earnings ratio) is 23 versus an industry average of near 50 and Amazon P/E of 95. Analysts are still positive on the stock with an average $328 price target.
The chart still holds trendline support with potentially a bullish triangle formation emerging.
This article was written for information purposes only and is not an incentive to purchase or sell shares. The author has no position in the stock mentioned. The author has not received compensation for this article except for in the normal course of written analysis.
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