Overblown China Fear Means Opportunity for Alibaba Stock

Overblown China Fear Means Opportunity for Alibaba Stock
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Alibaba Opportunity as China Fears Overdone

If you listen to the mainstream financial media, you would think that China was going to undergo an economic implosion amid the trade war with the U.S.

While it’s valid to argue that the Chinese economy is slowing and vulnerable to more weakness, the reality is that China is still growing its economy at over six percent.

The reported number out of Beijing pegged gross domestic product (GDP) growth at 6.6% for 2018—the slowest growth rate since 1990. (Source: “China’s economy grew 6.6% in 2018, the lowest pace in 28 years,” CNBC, January 20, 2019.)

Now whether you believe this number is true or not, the fact is the country is still likely growing at a much faster rate than any G7 country.

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But if you look at the comparative stock markets, you would think the Chinese economy was caught in a deep recession.

Nowhere has the selling capitulation been more impactful than the bellwether Chinese Internet stocks—the majority of which are in a bear market.

In my view, I feel the China story remains intact but will continue to be a bumpy ride.

Consider the situation with Alibaba Group Holding Ltd (NYSE:BABA), which is well off its high of $211.70 but has rallied 15.2% this year.

On the chart, BABA stock broke out of its downward trading channel to $160.50 on January 25—the highest since $164.98 on December 4.

BABA stock rallied after displaying a bullish double bottom with major support at around $130.00 in December and January.

Chart courtesy of StockCharts.com

If Alibaba stock can hold, there could be a short-term move to the next resistance level at $165.00 followed by a retest of $190.00.

Conversely, renewed weakness back toward $130.00 could be an opportunity.

BABA Stock Could Surge on Strong Quarterly Results

Alibaba will deliver its fiscal 2018 third-quarter results on January 30.

The major giveaways to look for in the quarter will be the monthly average users (MAUs) from mobile devices.

After reporting 666 million MAUs in the fiscal second quarter, Alibaba will look to up the number, albeit it’s already enormous by any standard. (Source: “Alibaba Group Announces September Quarter 2018 Results,” Alibaba Group Holding Ltd, November 2, 2018.)

The key for Alibaba will be its ability to monetize its massive user base.

I will also be looking at Alibaba growing its cloud business to more than the 6.7% of revenue in the fiscal second quarter. A strong cloud reading could drive BABA stock toward the key technical price levels.

Analyst Take

BABA stock trades at attractive 23.5-times its fiscal 2019 earnings per share (EPS), which is cheap relative to how fast revenues are growing. (Source: “Alibaba Group Holding Limited (BABA),” Yahoo! Finance, last accessed January 28, 2019.)

Compare that multiple to Amazon.com, Inc. (NASDAQ:AMZN), which trades at 62-times forward earnings, and you’ll see why Alibaba looks intriguing.

In the best-case scenario, Alibaba reports a strong quarter and there is a resolution to the China situation. But should BABA stock weaken again, investors might want to consider adding positions.