Alibaba: Where's The Bottom?

Summary

• Alibaba has been caught in one storm after another. After reaching a new high above $200 in January, the share price is now back to below where it started 2018.
• Beside the pressure from macro headwinds and competition, the stock also suffers from the perennial concern over its accounting and the possibility of interferences from the Chinese government.
• The share price is now just above the well-tested multi-month support line at $164.
• Could the low end of the analysts' price target prove to be an indication of a bottom as it did in the past?

The Volatile Stock Market Thus Far In 2018

Hangzhou-based Internet titan Alibaba (NYSE:BABA) has been caught in one storm after another. After a triumphant climb to a new price record in January, the stock wobbled before tumbling late in the same month as a rise in the 10-year treasury yield raised concerns that higher interest rates could ensue. In the next few trading sessions, Alibaba lost much of its gains for the year. Still, its performance was still better than that of the popular tech benchmark, the Technology Select Sector SPDR ETF (XLK), whose share price dipped below where it was at the beginning of the year. Subsequently, it managed to recoup some of the losses as sentiment improved in line with the broader market on favorable economic data and a belated response to an upward revision in its FY2018 revenue growth guidance.

BABA data by YCharts

Unfortunately, before it could recover to the above $200s level it achieved just a month earlier, Fed chief Jerome Powell's upbeat outlook on the economy and inflation spooked the market in the final trading sessions of February. Amid a flurry of deal-making, including a major investment in its Southeast Asian unit, Alibaba benefited from substantial positive media and analyst coverage and its stock staged another rebound from early March. Just when market players thought all is good, President Trump became the party spoiler with his firing of the first salvo against China with retaliatory tariffs on up to $60 billion in Chinese imports. Alibaba's stock reversed course and turned into a downtrend lasting till today. At this point, its year-to-date ('YTD') gains have all but completely disappeared. In contrast, another benchmark, the First Trust Dow Jones Internet ETF (FDN) still manages to be up 8.8 percent for the year.

First, Decide If Alibaba Is For You

If you want a sleep-well-at-night ('SWAN') stock, then Alibaba is not for you. It is already bad enough to be regarded as the world's most shorted stock - it would take Alibaba almost two more days than Tesla (TSLA), the most controversial stock by far (at least on Seeking Alpha, judging by the perennial tussle between the bulls and the bears among the contributors and the commenters which regular readers would know), to cover the short interest. It is also frequently singled out and accused by writers (or for the matter, research houses) for various shenanigans. I have, in comments, addressed certain frivolous claims. For some claims which I could offer more substantiation in rebuttals, I did so through published articles. Many savvy readers also contributed their own defense of Alibaba.

BABA Days to Cover Short data by YCharts

Nevertheless, Alibaba is like a giant octopus with wide tentacles and it is hard for anyone to fully comprehend the entire company. Despite my best efforts in analyzing Alibaba, I admit I still feel like one of those blindfolded men in the describing-the-elephant parable (see the drawing below).

(Source: The Northstar Journal)

Whenever accusations of fraud surface, investors ponder whether there is any truth or just another attempt by short-sellers to talk down the stock. The sophistication of the research done by established outfits like Muddy Waters meant that the allegations could be rather persuasive. No one can confidently say there is absolutely nothing wrong happening if something that appears credible is being brought up, probably not even the insiders at that instance, as the company is simply so big. Hence, until you have derived your own conviction in an investment in Alibaba, it is best to stay on the sidelines, lest you have to let go of your stake in moments of panic-selling when some shareholders decide to adopt a 'sell first and ask questions later' mode resulting in the stock price crashing.

Alibaba Has Been Making Big Moves But Its Share Price Is Not

It is healthy for investors to be skeptical but when you have decided to step into the house that co-founder Jack Ma is building, I suggest paying attention to what the company is doing to maintain its growth. It would be highly concerning if Alibaba keeps producing stellar revenue growth but its news flow has been quiet. I keep myself updated on new initiatives and investments of Alibaba and consider the implications of those on its long-term prospects. When I find there is something worthy to share with fellow Seeking Alpha members, I write about it if time permits. In doing so, I also hope to hear from the community any nuggets of information or thoughts that I might have missed. As such it has been fulfilling and helpful personally to participate in the vibrant comments stream of my prior articles on Alibaba.

Now that I am certain Alibaba is on the right track - actively seeking new markets or strengthening its foothold in less established ones - my attention is turned to its valuation. Despite making great strides in expanding its business influence and customer base in recent months, the share price appreciation of Alibaba remains stubbornly lagging that of Amazon (AMZN). I argued in The Potential Of Alibaba Is Severely Underestimated that the under-shopped Chinese relative to the Americans augurs well for Alibaba. The shopping center floor space per capita in China remains at a paltry 1.8 square feet NLA, a tiny fraction of that in the U.S. (23.5 square feet NLA). In addition, the upscaling of the local consumers is also a major tailwind for Chinese e-commerce firms.

The over 250 comments that ensued following the article provided an excellent sentiment gauge for Alibaba, as readers shared their myriad views regarding the company. As seen from the chart below, the share price movement of Alibaba has been rather stagnant in the past six months while Amazon managed to stay in the positive territory year-to-date despite facing the same stormy market environment and receiving a series of verbal blows from President Trump during the week.

AMZN data by YCharts

Interestingly, while the share price movement of Alibaba has been disappointing, it is not unexpected. The share price was already fluctuating within a triangle formation since August last year when I wrote the below passage in a mid-December article.

"I drew a rough extrapolation of the 200-day MA into the first quarter of 2018 which shows a good run-up towards the current support-line near $165, limiting the price downside. Should the triangle pattern continues, the share price could head for $200 and higher next year."

Unfortunately, while the share price did breach the $200 psychological level, it was unable to break out of the resistance line and on April 4, it even touched $166.13 at the lowest, just above the support line. Traders have plenty of profits playing the ups and downs but for the longs, it's back to square one again, as if there has been no fundamental progress made since August 2017. All the positivity following yet another highly successful Singles' Day event have all but apparently forgotten.

(Source: Chart from Yahoo Finance, Drawings by ALT Perspective)

Will The Support At $164 Hold?

The share price has rebounded whenever it came near to the support line in the past six dips since August 2017. Given that the prevailing price at $167.52 is only a couple of dollars above the support line at $164, the question is, "will the support hold up again?" After all, the share price had already breached the 200-day moving average, something which had not happened since 2016 April. If the support line doesn't hold, what is the next price level it could fall to? To answer this, I turned to the price targets from Wall Street analysts.

Interestingly, the share price has touched the bottom end of the price target range more often than it has for the consensus price target. The silver lining from this revelation is that the low end of the price target appears to be a rather good indicator of a bottom. Should the share price go below $164, perhaps it could reach for $143, the lowest price target level presently. Note that in the past three occasions when the share price went below the low end of the price target, the target price was not revised downwards. Hence, it's not a case of the tail wagging the dog, which would make the low end of the price target an ineffective indicator of the bottom.

BABA data by YCharts

Conclusion

Despite all the negativity surrounding Alibaba and its stock, its fundamentals continue to improve. According to Investopedia, the Piotroski F Score is used to "determine the strength of a firm's financial position" and in turn "determine the best value stocks," with nine being the best and zero being the worst. It is a productive way to rank stocks as the criteria involve profitability; leverage, liquidity, and source of funds; and operating efficiency categories. Alibaba's Piotroski F score has risen to its highest since its listing at 6.0 and is a testament to its improving operating numbers.

BABA Piotroski F Score (TTM) data by YCharts

Key common indicators, the Price-to-free-cash-flow (P/FCF) and price/sales (P/S) ratios are near one-year lows. P/FCF is now just 23.4x, compared with 34x just seven months ago. P/S has also fallen to just 12.9x from 18x in September 2017.

BABA Price to Free Cash Flow (TTM) data by YCharts

Major Alibaba shareholder SoftBank's (OTCPK:SFTBF)(OTCPK:SFTBY) decision to borrow $8 billion backed by its Alibaba holdings demonstrated its confidence that it would be able to achieve greater returns than if it were to sell the stake outright for cash. It can be argued that the low-interest rate for the loan at 1.5 percent justified the act. However, Naspers (OTCPK:NPSNY)(OTCPK:NPSND)(OTCPK:NAPRF) did not choose to borrow when it needed $10.6 billion recently. It decided to sell a portion of its massive stake in Tencent (OTCPK:TCEHY)(OTCPK:TCTZF). Nasper should be able to obtain similar interest rates if it was to borrow against its holdings in Tencent but it is telling that it chose to part with some of its Tencent ownership for cash instead.

The sustained undervaluation despite the fundamental improvements and the numerous positive strategic moves by Alibaba indicates that the market is perhaps too bearish on its prospects. Concerns that major shareholders such as Alibaba would trim their stakes causing an overhang should now be allayed following Softbank's signal that it would rather borrow against its Alibaba stake than sell any portion of it.

The share price has breached the 200-day moving average and the multi-months support at $164 now appears vulnerable. China has not yet responded to the second salvo of President Trump's trade tariff rhetoric. The sell-down of tech stocks also continues to weigh on Alibaba. If the support does not hold, the low-end of the analysts' price target range (currently at $143) looks to be a credible bottom as the share price had rebounded without fail in the past from there. An entry at this point would be a good risk-reward. Should the trade barbs turn out to be more bark than bite, and Alibaba continues to deliver on its results, investors would stand to profit handsomely.

What's your take? Readers who make a comment will have access to the comment thread indefinitely. Hence, please freely share your thoughts, let me know if you found this article useful, or provide your feedback in the comments section.

Author's Note: Thank you for reading. If you would like a refreshing take on stocks that you own or are interested in, try looking here. Besides US companies, I cover a number of Asian stocks as well. If you wish to be informed of my new ideas via email so that you have time to read them before the articles get locked behind a paywall 10 days from publication, please select "Receive email alerts" when accessing on a desktop computer.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long BABA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I may initiate a position in Tencent within the next 72 hours.

Comments

[Leon King]

I live in Singapore about 2230 miles from Hangzhou China. Even though my friends and Chinese living in Singapore are a couple of thousand miles from China, they regularly buy from Taobao and T mall and pay by AliPay. AliBaba is very much part of life in China. That is not to say that there cannot be accounting irregularities. Madoff and Enron sticks out. But for sure Aliababa's business is real and thriving and expanding at light speed.Ditto for Tencents. Without people Muddying the water we may be paying higher prices. As Buffet put it, it's good to buy great business at low or reasonable . I'm long Baba and TCEHY and don't mind buying at even lower prices.

[ALT Perspective]

"Without people Muddying the water we may be paying higher prices."

Well said!

[shogan]

Clearly Jack Ma is the designated tycoon , by Chinese PolitBuro, layers of communist apparatchiks at every level of Alibaba, without Communist party blessing, Jack Ma and his company spearheading Chinese Communist party agenda ,would not exist.

[ALT Perspective]

Hi shogan, Thanks for your comment. In the U.S., there are many lobbyists hired by various corporations to influence the government. Few big businesses can truly claim they do not need any government assistance in one form or another. So I see that in China, such business-government interactions appear in a different manner but the essence is similar.

[rnn]

Its a herd mentality stock.
Those can be dangerous, and momentum can turn on a dime.

[StrattonOakmont]

Its amazing what one day can do!

[Eager to learn]

Thank you for the article and the questions it raised. Whatever its shareprice, Baba is worth waiting for the summer with its very likely listing in China. Development on India Flickart's front also worth patience.

[ALT Perspective]

Thank you for your comment and sharing your thoughts.

[kencav]

Not for anything but https://cnb.cx/2Jzo6xJ.
They have made promises before so let’s see what happens now....

[ALT Perspective]

Hot off the press from WSJ: Ant Financial Services Group, carved out of his e-commerce giant Alibaba seven years ago, is preparing to raise $9 billion in a private funding round, according to people familiar with the matter.

That could value Ant at close to $150 billion, they said, making it by far the world’s largest unicorn—a term used to describe private companies valued at over $1 billion.

[Stanward99]

The bottom was made Friday

[choraleprelude]

I have used Alibaba Cloud since 2014. Even though I am more familiar and comfortable with Amazon's AWS offering, I could say that the BABA product has improved a lot over the years. Same with it's Alipay services. BABA's products and R&D output are indeed quite solid based on my experience

[Nell_E]

@choraleprelude how are using Alibaba cloud? what makes you decide which provider to go with? thx

[choraleprelude]

The style of Alibaba cloud's management console interface is quite similar to AWS's. Thus if one is familiar with AWS, the person will also feel at home using Alibaba cloud... (whereas Microsoft Azure uses a very different design style in the UI interface)

As for how to decide which provider to go with, we chose Alibaba cloud to serve our customers in China and other main cloud providers to serve customers outside of China...

[ALT Perspective]

Thanks for sharing.

[Azdoorbell]

With all the investments BABA made in the last two months, will pay off down the road strongly

[Vandooman]

As someone who has done a fair amount of business in China I would add the following.

One of the main reasons BABA listed in the US was to gain credibility. No one in China trusts Chinese financial statements. It is a good sign but don't get too excited because an audit of BABA would be a formidable experience.

What sets BABA apart is the enormous depth and breadth of what it is doing in China and elsewhere in Asia. BABA could be many times as big as it is 10 years from now. It is a speculative play because of China but could be a huge winner. Going into the minute details of analysis of BABA is a total waste of time. What were the sales? What was the reported income and from what sources? Time to move on.

This is a company that can compete on a global scale and would be the biggest threat to Amazon in retail if they entered the US market. Ma is too smart to do that because why would he compete with a company that ignores poor profitability? Why enter the US when India will do? On the other hand BABA sells stuff very cheap because they do not build infrastructure so who knows? Get your goods in 5 days instead of 2 at a lower price.

[mikeccall]

Perhaps Ma's path is to get so wildly profitable they can enter the US market to then have the financial health to Amazon, Amazon.

[ALT Perspective]

Hi Vandooman, Outstanding comment. Thanks for sharing your insights.

[shogan]

BABA is an officially approved company of Chinese Politburo. Ma, is just a care taker, one wrong step and he will be replaced.

[Vandooman]

One wrong step and any CEO can be replaced.

[iou2buckz]

which listing does baba closely follow? NASDAQ, tech, consumers Russell, kensho etc?

[Glenn Abrett]

As one of the seven sisters (tencent, amazon, facebook, microsoft, apple, google are the other six) baba sits atop the world of commerce and grows stronger every day. I thought one of the most significant events of the past few years were the allegations, made by the supposedly all powerful Chinese government, of fake designer goods being sold on Alibaba. Jack Ma basically told the government to mind its own business. The government backed down. As trumps bashing of amazon and the blown way, way out of proportion by the media 'privacy invasion' charges against facebook and the EU changes in various rules it is beginning to seem like governments are making a last ditch attempt to reign these monsters in. Maybe. But I doubt it. And in a very short time these seven will, at least collectively, be more powerful than any government.

Missiles and tanks are nice, but cash is king.

[Golden 1462]

Chinese restrictions were behind the stock listing outside of China. The government could kill the stock if they were to enforce internal policy.

The listing came about because Goldman Sachs, an investment banker entrenched in our government, pushed the idea.

Does China recognize BABA stock as having voting rights?

[MarSzu]

BABA and AMZN should never be compared. They are different structures and cultures altogether. That said, BABA is a monster in both terms of revenue and growth as well as potential and my smallest holding in terms of my what-if factor. It's not a U.S. shop and so, trade wars likely won't impact it in many ways. In fact, it might actually bolster BABA if the U.S. is dumb enough to put tariffs on China and not on other Asian countries and manufacturers. (India will just buy the goods from China and then pass it through taking the "made in China" label off in the process. Isn't Capitalism great?!) I expect to see the price rocket forward over the coming years and agree with above comments that China will treat BABA like it's face to the world and won't let it fail despite some of the internal mis-givings.

[Stanward99]

The Risk Reward, at this price is unreal, anything can happen as with any stock, as i have learned in 22 years of investing , however i am a buyer here of BABA and MOMO!

[Jack McNeill]

I expect that BABA will continue to bounce around for a while and then settle down to a slow upward climb- mirror of the health of economic China. Investing in BABA is for the long term, not for short term gains for investing. Long term in China has a different meaning than our own meaning of "long term."

[ALT Perspective]

Hi Jack, Thanks for making your first ever comment on Seeking Alpha right here in this article. Welcome!

[StrattonOakmont]

Its like buying coke at $7!

[Leyton House Aces]

I don't really care where BABA is today or next year. I have a full position at average cost of $98. I *do* care that it ends up much, much higher in next 10-15 years....like at $1000

[vittoconta1]

Same target price at the same time for me

[StrattonOakmont]

My cost basis is around $92 for Baba. I just added on friday again. I agree though, in 20 years from now...I will have a handful more of companies worth a LOT. A better return than any dividend could dream of doing.

[Buyandhold 2012]

No clue where the bottom is in Alibaba. It is not a stock that interests me.

[kencav]

Yet you ready the article and find it necessary to make that comment. Thanks for the update.

[Stanward99]

Then why are you commenting?

[ALT Perspective]

BAH 2012, Thanks for reading and commenting. I appreciate your support.