Alibaba Stock Could Surge on Results
After witnessing a massive blowout quarter from Amazon.com, Inc. (NASDAQ: AMZN) last Thursday, which drove the stock price up 13% intraday, we are now getting set for Alibaba Group Holding Ltd (NYSE: BABA) to report this Thursday.
Many of you know that I was bullish on both stocks when they were at levels well below the current prices. As far as I’m concerned, both stocks would make great additions to a portfolio.
On a comparative basis, Alibaba stock has easily outperformed Amazon this year, surging 100% year-to-date, compared to the 47% move by Amazon.
The technical breakout for this stock surfaced around April 2016, when it broke $80.00 in a bullish golden cross pattern. To say that the advance has been great is an understatement.
For FY17 Q2, Alibaba is expected to earn a consensus $1.04 per diluted share on revenue growth of 51.7% year-over-year to almost $7.9 billion. (Source: “Alibaba Group Holding Limited (BABA),” Yahoo! Finance, last accessed October 27, 2017)
Should Alibaba report a blowout quarter, the stock price will surge. The options market for the at-the-money $175.00 call expiring on November 3 suggests a 7.42% move in either direction, meaning BABA stock could trade at between $162.00 and $188.00 after the results.
BABA Stock Has Tremendous Upside
What I’m looking for is the growth in the underappreciated cloud segment, which I view as extremely promising for Alibaba, and a key area for future growth.
Alibaba head Jack Ma is driven, and he envisions the company becoming one of the biggest companies in the world by the time he calls it quits.
Of course, with a current market cap of about $451.0 billion, Alibaba is not that far away from the $527.0 billion in value assigned to Amazon, but well behind the $840.0-billion value of Apple Inc. (NASDAQ:AAPL).
A look at the comparative revenue growth rates favor Alibaba, but what the company needs to do is drive its earnings growth higher, to the level of Amazon.
Comparative Revenue Growth
On the earnings side, Alibaba has been attracting higher earnings per share (EPS) revisions over the past 90 days. For FY18, the consensus EPS has jumped from $4.58 to $4.91, and from $6.13 to $6.57 for FY19. Positive revisions are generally bullish for a stock.
As far as the relative valuation goes, Alibaba stock trades at less than 27 times its FY19 EPS, whereas Amazon trades at a much higher 144 times its 2018 EPS.
But what Alibaba needs to do is to drive earnings growth. The stock’s price/earnings to growth (PEG) ratio of 47.3 is much higher than the 4.8 assigned to Amazon.
As I mentioned earlier, depending on the results, BABA stock could rally by $13.00 or so on strong results, which would drive the price closer to the $200.00 level.
Chart courtesy of StockCharts.com
If Alibaba under-delivers, I would be looking at accumulating BABA stock on weakness, down toward the $162.00 level or lower, depending on the results.
Whichever way Alibaba stock runs, my bullish view toward the vision of Jack Ma holds, and this will only be a good sign for investors.