Alibaba Singles' Day: Cash In On The Big Hype

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About: Alibaba Group Holding Limited (BABA)
by: All North Ventures

Summary

BABA corporate strategy showed that the company is fundamentally sound.

There are three things going for BABA.

Challenges and turmoil in the short /medium term.

Trading strategies for BABA going forward.

From its humble beginning as an AMAZON wannabe, BABA has transitioned from a traditional e-commerce marketplace to a big data conglomerate, with transaction data from its marketplaces, financial services, and logistics businesses allowing the company to move into cloud computing, media/entertainment, and online-to-offline services. We have long thought that a strong and wide network effect can allow e-commerce players to extend into other growth avenues, and nowhere is that more evident than BABA.

BABA’s Internet services affect the vast majority of Chinese Internet users in some way, including a +70% penetration rate for the Taobao/T mall e-commerce marketplaces. This provides BABA with an unparalleled source data that it can use to help merchants and other consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and improve return on investment. BABA's marketplace monetization rates continue to improve, indicating that sellers are becoming increasingly dependent on BABA's marketplaces and payment solutions, and retail revenue per active user continues on an upward trend, owing in part to an emphasis on higher-quality merchants.

BABA’s Internet services affect the vast majority of Chinese Internet users in some way, including a 70% penetration rate for the Taobao/T mall e-commerce marketplaces. This provides BABA with a large source data that it can use to help merchants and other consumer brands develop personalized mobile marketing and content strategies to expand their target users, increase click-through rates and physical store transactions, and improve return on investment. BABA's marketplace monetization rates continue to improve, indicating that sellers are becoming increasingly dependent on BABA's marketplaces and payment solutions, and retail revenue per active user continues on an upward trend, owing in part to an emphasis on higher-quality merchants. BABA's vision and company strategy is fundamentally sound.

THREE THINGS GOING FOR BABA

First, BABA China marketplace boasted 600 million active buyers, almost 40% of total online population of the country. Expansion into the rest of the world provides even more opportunities.There is still a long runway for user growth. Second, the Chinese consumer is relatively healthy, backed by wage growth, solid household balance sheets, and access to consumer credit. Third, complementary businesses like the combined Ele.me/Koubei, New Retail/Hema, and cloud computing have shifted BABA from being a C2C to B2C improving monetization on overall transactions.

CHALLENGES AND TURMOIL IN THE SHORT-MEDIUM TERM

Rapid expansion of other China digital commerce players like JD.com and VIP shops could limit BABA's growth aspirations in some product categories.The intransigence of international brand names may stall BABA from becoming the premium name in retail e-commerce.

As BABA expands globally, its dominance may attract antitrust issues from countries that tries to protect their own e-commerce companies.

BABA ex-chairman Jack Ma stated that the China/USA trade war will not last for 20 months or 20 days, but "maybe 20 years". We have taken the view that this is much more than a( trade war )in our most recent blog post. The macroeconomics in China is dire at this moment but we are certain that the second most powerful economy in the world (and it owns 1.2 trillion in US Treasury notes) will navigate out of this situation with the appropriate government fiscal/monetary policies (the Chinese government announced the first reduction of personal income tax rate in 7 years in August this year). In our view in a declining economy we actually think that the Chinese consumers will actually gravitate toward e-commerce sites such as BABA to look for bargains. The Chinese consumers are savers and their household debt/GDP ratio is high but it is still quite low compared to US (49% vs 77%). There is plenty of purchase power left in this population.

STRATEGIES FOR BABA GOING FORWARD

By the time this article is published we will know the USA mid term election results. We do not anticipate major policy changes regardless of which side made gains in the congressional and senatorial contest. We do believe that if the GOP lose majority of the congress then the trade war will be tempered somewhat. This will give China a small window of opportunity to make some concessions to the US and most importantly 'save face' in the process.

We are suggesting that there should be no long term commitment in BABA in the short term. By observing the momentum in the last six months a jagged downward trend has emerged. We are offering a short term trading strategy:

From now until 11/11/2018 (Singles Day) there is an upward trend towards the 152-155 level. Our prediction is that this will revert back to 142-149 level . We are recommending buying BABA into this date and sell on or near 11/11, then buy back when it is near the bottom of the trading range. You can deploy your investment incrementally in this trading range either by trading in stocks or options.

Chart BABA data by YCharts

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BABA is fundamentally sound and it is a long term accumulation stock. For the time being we do not recommend buying BABA until the macroeconomics in China is stabilized we would recommend short term trading with the view that BABA sp will continue to fluctuate in a downward or sideways pattern.

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.

Additional disclosure: we are recommending trading strategies on BABA in the short term.