Here’s Why Alibaba Stock Is Going Higher
Alibaba Breaks to Record High with More to Come
Since displaying a bullish golden cross pattern on the stock chart at $80.00 in April 2016, shares of Alibaba Group Holding Ltd (NYSE:BABA) have been rocketing on the chart, up 61% in one year. And there is likely much more to come if CEO Jack Ma gets his way.
BABA stock traded at a record $126.40 on May 19 after breaking above chart resistance at $110.00.
Alibaba stock is on steroids but, compared to its U.S. rival, Amazon.com, Inc. (NASDAQ: AMZN), BABA shares are much more attractive, even if you were to price in a discount for the China risk.
At $126.40 per share, Alibaba trades at a really reasonable 22× its 2018 earnings per share (EPS) and 7.78× its book value. Amazon trades at 90× and 22.2× respectively.
Chart courtesy of StockCharts.com
What Alibaba needs to do is to ramp up its revenues and its growth rate to those of Amazon. For instance, BABA stock trades at a staggering price/earnings to growth (PEG) ratio of 45.42, and 13.7× trailing sales.
In comparison, Amazon has a PEG ratio of only 5.45. On a sales basis, Amazon trades at a superior 3.4× trailing sales.
What BABA Stock Needs to Do
Looking at the comparisons, Alibaba could see a much higher share price if it can drive its revenue and earnings on an absolute level. Alibaba already has projected revenue growth rates that are superior to Amazon, but is much smaller, based on the actual revenues.
To achieve the scale of Amazon, Alibaba is aggressively expanding its business via numerous ventures, including trying to market millions of U.S. small businesses to consumers in China. This would help drive revenues as well as please President Donald Trump.
And, just like Amazon and its move into the brick-and-mortar grocery store business, Alibaba just announced it’s acquiring an 18% interest in grocery chain Lianhua Supermarket Co Ltd (HKG:098).
This move is on a much bigger scale than “AmazonFresh,” as the Lianhua chain comprises more than 3,600 stores in China. This investment has added to Alibaba’s $4.6-billion investment in electronics retailer Suning Commerce Group Co Ltd (SHE:002024) in 2016.
There’s clearly a sense that Alibaba wants to diversify its holdings and expand its supply chain in order to drive the company’s core online sales.
Over the next few years, I fully expect BABA stock to accelerate higher to the $150.00 level and, depending on its success, ramp up revenues and earnings. The stock could move even higher, especially if it can attract a higher multiple by the market.
Ways to Play Alibaba Stock
There are numerous ways to play Alibaba stock if you currently don’t hold a position. Don’t be nervous about the record-high price; remember there were several concerns about Amazon at $700.00 per share; now that stock trades at more than $1,000.
You can establish a lower entry point by selling put options in BABA stock and collecting the premium to lower the adjusted cost base.
Alternatively, you can buy Alibaba shares and sell calls against your position. This allows you to set a selling price for your stock, as well as generating some premium income to lower the cost base. Just be careful not to set the strike price too low if selling short-term calls, as the risk of being called away would be high.
