Alibaba Stock: Long-Term Potential Compensates for Short-Term Risk

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BABA Stock: Battered but Long-Term Bull Story Is Intact

Based on the current market action, it seems like a wrecking ball has battered the Chinese stock market while domestic indices trade at record levels.

Perhaps President Donald Trump’s trade tactics are working if the goal is to take down China, but the outcome is far from over, and China President Xi Jinping has yet to beg for mercy.

The stage does appear to be set for a further deepening trade escalation on news that Trump is seriously considering placing a 25% tariff on another $267.0 million of Chinese imports, and perhaps eventually putting tariffs on all Chinese imports.

So, while Trump’s base may be rejoicing, the issues that will arise are the higher prices paid by the American consumer and the threat of an economic whiplash.

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If you are an investor in Chinese Internet stocks, the aftermath of the trade war has been bearish on your holdings, but it’s not time to run for the exits.

Alibaba Group Holding Ltd (NYSE:BABA), one of the top Internet stocks, has been taking it on the chin, down 21% over the past three months and 3.82% over the past year, versus a 16.4% and 100% gain by Amazon.com, Inc. (NASDAQ:AMZN) during the same time frame.

BABA stock is being crucified by the China risk, but the reality is that Alibaba will weather the storm and hold on to its perch as one of the world’s top Internet stocks.

The Shanghai Stock Exchange is currently facing a bear market, down 18.9% from its 52-week high and searching for much-needed support.

The reality is the situation could worsen in China, which of course could drive a global contagion to other economies, both small and large. This is the overhanging risk.

In the case of Alibaba, the trade escalation will hurt in the immediate term and the share price could further deteriorate until we hopefully see a fair resolution.

What to Do as an Investor in BABA Stock

As I said, there likely could be more rough waters ahead for Chinese stocks and Alibaba stock.

A disruption in the East-West trade will hurt Alibaba, but you can rest assured that CEO Jack Ma is searching hard to find new markets and establish new businesses.

On the chart, BABA stock fell to $158.67 on September 6 in the process of breaking out of its one-year sideways support at around $167.00 after failing to hold the $180.00 support level.

Chart courtesy of StockCharts.com

Even worse is the emergence of a bearish “death star” in late August for Alibaba stock, a threatening situation when the 50-day moving average breaks below the 200-day moving average.

Chart courtesy of StockCharts.com

Failing to hold the current levels, BABA stock could falter toward key support at around $150.00, last encountered in mid-2017.

Analyst Take

While Alibaba stock is down 23% from its record high of $211.70 on June 5 and in bear market territory, my view is that traders should look at further weakness in BABA stock as potential entry points.