Why Alibaba Stock Could Be Great
Alibaba Group Holding Ltd (NYSE:BABA) is set to report on November 2, and I will be looking for growth in the company’s massive 434-million user base, as well as the progress of the highly coveted “Alibaba Cloud.”
While Alibaba Group Holding Ltd co-founder and CEO Jack Ma could be compared with the fictitious Ali Baba character from the wise tale “Ali Baba and the Forty Thieves” (as both took advantage of opportunities), Jack Ma is a real person and, if you believe what he suggests, BABA stock could turn out to be a generational stock.
In his annual letter to Alibaba stock shareholders, Ma explained that he has ambitious plans to make Alibaba a world power within 20 years, serving two billion consumers globally and creating 100 million jobs via 10 million profitable companies.
Ambitious he is, but whether these lofty objectives will be fulfilled during Ma’s lifetime is debatable. I wouldn’t bet against Alibaba though.
BABA stock is currently reaching for the $100.00 level, where it has hovered for the last month, as investors look for more evidence of growth, namely in the emerging cloud unit, which could turn out to be the game changer for Alibaba stock.
Chart courtesy of StockCharts.com
Why Bulls Could Drive BABA Stock
My bull thesis for the long term of Alibaba stock lies with the rapid growth of the company’s massive user base, which represents active consumers wanting to buy goods. The thing is, Alibaba will likely close in on 500 million active users, which is much more than any other Internet shopping platform in the world.
If Jack Ma can continue to monetize these shoppers, especially given the Chinese government’s push to drive spending, I would in turn expect Alibaba stock to reap monetary benefits.
An example of the massive retail reach of Alibaba stock is its annual one-day “11.11 Global Shopping Festival” which generates over $10.0 billion in sales, which makes Black Friday and Cyber Monday sales figures look like small change.
The current retail ecosystem of Alibaba Group Holding Ltd is primarily targeted at the consumer, but the move to sell cloud services to all of the small businesses within the company’s retail markets is intriguing, and could be the catalyst for the next upward push.
An area that Alibaba Group Holding Ltd could really explore is the market for steaming video. We all know the problems that Netflix, Inc. (NASDAQ:NFLX) is facing in trying to break into the Chinese market, which is a massive opportunity for Alibaba stock.
For the trader, there are various ways to play BABA stock heading into the November 2 release date. Looking at the November 4 expiry for Alibaba stock, the at-the-money $102.00 calls and puts predict a roughly-6.3% move in the stock in either direction.
For example, if the feeling is that BABA stock moves higher after the report, a trader could initiate a bullish call spread. An example would be buying the $102.00 call for $3.55 and, conversely, selling the $110.00 call for $0.84. The $110.00 strike is used as it represents a roughly-6.3% move to just above the 52-week high of $109.87.
The net cost is $2.71, or $271.00 per contract, with the break-even mark at $104.71. The profit caps out at $529.00 per contract.
Now, if the belief is that the opposite will occur and Alibaba stock will decline, a trader can put forth a bearish put spread. This can be done via buying the $102.00 put and selling the $96.50 put (roughly the downside move based in the options). The cost of the trade is $201.00, with the break-even at around $100.00. The maximum profit is $350.00 per contract.
Of course, what I’m presenting above about Alibaba stock is only an example, and should not be construed as an actual trade.