Shares of Alibaba (NYSE:BABA) are finally finding some support after a sharp sell-off. BABA stock is the largest online commerce company in China (and perhaps the world). As such, Alibaba stock has felt the impact of the recent trade wars between the U.S and China more than most companies. It is important to note, however, that revenues from the U.S. for Alibaba comprise a small fraction of the overall pie. The trade wars may be escalating, but the recent weakness in Alibaba is an opportunity to grab growth at a reasonable price.
Earnings are due in Alibaba before the market opens on Wednesday. Expectations are for 99 cents in EPS on $13.47 billion in revenue. The whisper number is for earnings of $1.04. InvestorPlace contributor Tescan Gecgil did a deep drill down on what to expect from that report. I look for solid, if not spectatcular, results.
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After reaching nearly 50, the price-to-earnings ratio has dropped considerably recently and now is nearing 45. While certainly not cheap, the multiple contraction does make Alibaba stock considerably more attractive at current levels, especially considering the solid growth prospects for Alibaba in cloud, AI, and other initiatives besides retail.
In my previous post on BABA stock from a month ago, I had a decidedly more bearish outlook on Alibaba. At the time, the stock was around $185 and expected a pullback. Now that BABA stock has dropped some 5% from those levels, my outlook has changed — because price does matter. The combination of earnings growth and a lower stock price sets up BABA as a longer-term buy.
Alibaba stock is looking attractive on a technical basis. BABA has bounced four times off the support area at $174. The 9-day RSI is nearing oversold levels that has marked significant short term lows in the past. MACD is also at extremes which has corresponded to impending moves higher. Implied volatility (IV) is finally tempering after reaching a peak.
Investors looking to add China exposure at attractive levels can add Alibaba to their portfolio on any weakness. Although the IV has fallen, it is still elevated in front of the earnings release-meaning option prices are expensive. Selling January $200 calls at $10 will reduce the risk by 5% while still leaving plenty of upside appreciation.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
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