Not too long ago, Alibaba (NYSE:BABA) stock was a fan favorite on Wall Street. It has fallen out of favor of late, mostly its own doing.
Source: zhu difeng / Shutterstock.com
It is rare that management commits unforced errors, so the reaction in Alibaba stock was violent. They paid dearly for what was a lapse in judgment by its former CEO and co-founder, Jack Ma, who criticized the Chinese system. This unleashed swift retaliation from the state. BABA equity holders suffered a lot due to no fault of their own either. Luckily this dip creates new opportunities.
Investors have for months anticipated the arrival of the largest initial public offering by ANT Financial. Alibaba owns a one-third interest in it so it was due for a big payday from that. Then, without much warning, earlier this month we learned that they canceled the IPO indefinitely. Moreover it turns out that it was under orders from President Xi of China.
It’s never a good idea to antagonize someone who completely controls the future of your company. Even though Mr. Ma is no longer on active duty, Alibaba stock lost 20% of its value quickly. First on the ANT headline then on subsequent disappointments from earnings.
Alibaba Stock Story Has a Happy Ending
Putting the recent skirmishes with the Chinese government aside, the fundamental story behind Alibaba stock has never been better. Singles Day broke records again this year. There’s nothing broken with the company itself; the stock is just in temporary purgatory. The selling came from fears of more actions from by Beijing and knee-jerk reactions to lofty expectations.
Fundamentally it still has a relatively low price-earnings multiple of 30x, and the price-to-sales is only 8x. This is in line with most other giga-caps in the U.S. Only Amazon (NASDAQ:AMZN) has a much lower price-to-sales ratio. Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) and Facebook (NASDAQ:FB) all are in line with Alibaba stock give or take.
There’s no telling what the face off with China will do to the bullish thesis short term. My assumption is that there will not likely be sustained long-term consequences. We can only trade the current financials without speculating on future actions.
So far the company has executed on plans flawlessly and Wall Street had adopted it as one of its own. Last year U.S. regulators targeted Chinese IPOs but not to stop the likes of Alibaba stock from listing here. The goal was to avoid having another situation like Lukin Coffee (OTCMKTS:LKNCY). At first it looked like it was the Starbucks (NASDAQ:SBUX) slayer in China, but it turned out to be a complete fraud. Investors here and abroad lost a bundle on that.
In contrast, the Alibaba fundamentals are as healthy as ever and bring no reason for the bears to short it. The upside potential in BABA stock is definitely more substantial than the risk below. If the intent is to hold the shares a long time, then this is as good a time as any to start. This too shall pass. Although this may not be a perfect bottom floor but it’s clearly not a flagrant mistake.
Good Fundamentals Still Matter
Click to EnlargeSource: Charts by TradingView
The fundamentals are strong and the technicals support that message. It just corrected 20% and fast, so a lot of the weak hands fell off already. What’s left are a bunch of investors who have better conviction. This is how rallies in good stocks gain footing.
Year-to-date Alibaba stock is still up 27% only slightly lagging the NASDAQ Composite index. Clearly this is not a result to mourn. Those who felt they missed it on the first go-around when it hit $320 last month should consider this a gift. This is a second chance at something that already happened once and will happen again.
There are extrinsic risks from the entire stock market. The macro-conditions have not yet improved but the sentiment has recovered too well. This is purely on the back of three headlines from Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA), and AstraZeneca (NASDAQ:AZN). All three have announced incredible efficacy of their vaccines against the Covid-19 virus. People are eager for this to become a reality and maybe too eager at that. This may have built up system-wide froth in the stock prices.
If there is a letdown from that sugar high then there is downside risk from that wave in Alibaba stock. Left alone, I bet this company will continue to flourish and execute on plans the way it has been.
Follow the Froth
The path upward is definitely easier than the one that leads to disaster. Markets are buying frothy companies in droves. This is an indication that the good ones will also follow eventually. There is no real fear on Wall Street. Otherwise they wouldn’t be buying up perceived froth 10% on a day when the NASDAQ is down 1%.
The VIX is no longer an effective measurement of fear. This is like the CPI trying to measure current inflation . We all know it’s there, yet for some reason the measuring stick is broken. Caution is a good idea but is not a reason to short Alibaba stock.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
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