Expectations were high for Alibaba‘s (BABA) Singles Day annual shopping event in November, and the company didn’t disappoint as sales nearly doubled from the year-ago period to $74 billion. But the threat of increased regulatory scrutiny has weighed on Alibaba stock. Shares plunged around 13.5% in November and are down another 3% so far in December. Alibaba stock has pulled back 19% off its recent high and the stock looks like it’s on sale, but does that make BABA stock a buy right now?
Sellers were in Alibaba stock on Nov. 3 after the $34.5 billion Ant Group IPO was suspended in Shanghai and Hong Kong. Ant Group is the fintech arm of Alibaba.
Sellers were in Alibaba stock again on Nov. 5 after the company reported earnings and missed on sales. But buyers lifted Alibaba stock off lows by the close.
BABA stock crashed another 8% on Nov. 10 after Chinese regulators announced new draft antimonopoly rules for China online platforms like Alibaba and JD.com (JD), among others. Alibaba stock has had a hard time attracting buyers since then.
Alibaba Stock Fundamental Analysis
When it comes to liquid, megacap stocks in China, it’s hard to find a more compelling name than Alibaba. The stock has been a big winner since its IPO in September 2014.
In June, Alibaba reported record sales at the 618 shopping festival in China. Sales across the e-commerce giant’s shopping platform totaled $98.52 billion. Known as 618 because it occurs every year on June 18, Alibaba’s strong sales showed that the China consumer is alive and well.
The company has been able to stay in growth mode despite a slowdown in its core e-commerce business.
Alibaba’s business in China looks a lot like Amazon’s in the U.S. Alibaba’s cloud-computing business is showing solid growth, just like Amazon’s booming web services business.
Alibaba also sees dollar signs in food delivery. In 2018, it merged its food delivery service Ele.me with its lifestyle app Koubei to better compete with Tencent (TCEHY)-owned Meituan.
Sales at Alibaba’s digital media and entertainment unit are also rising. The unit includes Alibaba’s videostreaming platform Youku, along with its music streaming service, Xiami. Alibaba also has a licensing agreement with Walt Disney (DIS) unit Buena Vista International, giving it access to a large amount of Disney content.
And just like Amazon, Alibaba sees potential in the sports streaming market. In 2018, the company partnered with China Central Television and streamed all matches of the 2018 FIFA World Cup. Alibaba said the World Cup, as well as continued investment in original content, fueled daily average subscriber growth of 200% for Youku.
Alibaba’s Composite Rating of 88 (scale of 1-99 with 99 being the best) is helped by strong earnings and sales growth in recent quarters along with excellent 12-month price performance.
For a megacap stock, Alibaba continues to deliver torrid growth. But earnings and sales growth slowed dramatically in May, hurt by the coronavirus outbreak. Adjusted profit inched up 2% year over year to $1.30 a share. But that was well above the consensus estimate of 85 cents. Revenue increased 16% to just over $16.14 billion, also above expectations of $15.1 billion.
The company on August 20 reported a 15% rise in quarterly profit. Sales increased 30% to $21.76 billion.
Alibaba breaks down its revenue into four segments: Core Commerce, Cloud Computing, Digital Media and Entertainment and Innovation Initiatives. Core commerce revenue jumped 34% to $18.9 billion. Cloud computing revenue increased 59% to $1.75 billion, accounting for the lion’s share of total revenue.
Mobile monthly active users totaled 874 million, up 15.8% from the year-ago quarter and 3.3% sequentially.
Annual return on equity of 21% and pretax margin of 31.3% help its top-notch SMR Rating (sales + margins + return on equity) of A from IBD Stock Checkup. With Stock Checkup, you can easily see who the group leaders are based on a combination of fundamental and technical factors.
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For its current fiscal year 2021, earnings per share are expected to jump 36%, with 22% growth seen in fiscal 2022.
Alibaba Stock Technical Analysis
After a heavy volume breakout for Alibaba stock in late November 2019, the coronavirus stock market crash brought sellers into the stock. But the leading China stock and member of IBD’s Long-Term Leaders portfolio soared out of a 24-week consolidation in July.
A 36% pullback for Alibaba stock in the second half of 2018 shook out a lot of sellers in the stock and ultimately served to reset the base count.
Alibaba broke out of a flat base with a 268.10 buy point during the week ended Aug. 28. It rallied for a bit, then started to pull back with the broad market. A new flat base formed with a 299.10 buy point, although an early entry was seen when Alibaba stock gapped up on Sept. 30.
Sagging RS Line
Alibaba’s relative strength line has been trending lower for several days now. A stock’s relative strength line, found in daily and weekly charts at investors.com, compares the stock’s daily price performance to the S&P 500. An upward-sloping RS line means the stock is outperforming the S&P 500. A downward-sloping line means the stock is lagging the S&P 500.
The bottom line: Alibaba stock is not a buy now — not with the stock starting to live below its 50-day moving average. Alibaba has started a new consolidation phase. Renewed signs of institutional buying would help the stock’s cause, but it’s not happening yet. It’s best at this point to wait for a new base to form.
Follow Ken Shreve on Twitter at @IBD_KShreve for more market insight and analysis
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