Alibaba stock is 30% off its high despite compelling fundamentals. The stock looks like it’s on sale now, but is BABA stock a buy right now?
Some might argue that all the bad news is priced into Alibaba stock after China regulators fined the company $2.75 billion after an anti-monopoly probe.
The fine comes after founder Jack Ma made critical comments of China’s regulatory system in late October, saying it stifles innovation.
After falling 2% Friday, Alibaba (BABA) is selling at a relatively cheap valuation of 24 times trailing earnings and 19 time forward earnings.
Sellers Hit BABA Stock
Sellers knocked Alibaba stock lower 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.
Latest Earnings Report
Alibaba’s earnings report in February revealed another quarter of strong bottom-line and top-line growth.
Adjusted earnings rose 30% to $3.38 a share. Revenue growth accelerated for the third straight quarter, jumping 46% to $33.87 billion. Revenue for the company’s cloud computing business grew 50% year over year to $2.47 billion.
“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.
One day after its earnings report, Alibaba stock jumped 3.5% on Feb. 3 after the company’s fintech arm, Ant Group, struck a deal with Chinese regulators to restructure and become a financial holding company. Ant Group operates a suite of financial products, including the widely used Alipay digital wallet in China.
Alibaba Stock Fundamental Analysis
With a five-year annualized earnings growth rate of 29% and a sales growth rate of 47%, it’s hard to find a company with a more impressive track record of growth than Alibaba. It’s 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.
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Alibaba’s Composite Rating of 54 (scale of 1-99 with 99 being the best) has been hurt by sluggish price performance in recent months.
Still, 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.
But earnings and sales growth accelerated nicely when the company reported earnings in August. Quarterly profit increased 15%, with revenue up 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.
Mobile monthly active users totaled 874 million, up 15.8% from the year-ago quarter and 3.3% sequentially.
Earnings and sales growth accelerated again in November when the company reported a 44% jump in quarterly profit and 37% increase in sales.
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 36%, with 15% 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 Shutterstock (SSTK) 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. But Alibaba, formerly 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 stock has been on a sharp downtrend since hitting a high of 319.32 in late October.
Alibaba’s relative strength line has been trending sharply lower. 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 and below its 50-day and 200-day moving average lines, Alibaba is not a buy now because it still has overhead supply to work through.
Risk averse investors will wait and see if Alibaba can get back into rally mode and fully form the right side of a base. Renewed signs of institutional buying would help the stock’s cause, but there aren’t any signs of it yet.
An early entry would be seen if Alibaba stock can rally back above its 50- and 200-day lines and break out over its February high of 274.29.
Follow Ken Shreve on Twitter at @IBD_KShreve for more market insight and analysis
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