Alibaba: Buy The Pullback (Rating Upgrade)

Summary:

• Alibaba’s stock broke out of a prolonged trading range, reaching new highs above $117.50, prompting a bullish outlook.
• Despite missing earnings and revenue estimates, international segments like AliExpress and Lazada showed 32% annual growth.
• Alibaba Cloud posted $3.74 billion in revenue, indicating 6% annual growth, suggesting long-term growth potential.
• Buy on pullbacks to $100.20 with a stop-loss below $89.50, considering geopolitical risks and potential downside momentum as notable factors.

When I last wrote about Alibaba (NYSE:BABA) on May 15th with “Alibaba: Dead Money Continues to Disappoint”, the stock was caught in a long-lasting sideways trading range that had followed a period of highly excessive declines (-81.33%) during the previous two-year period:

Since then, we have seen the stock break out of its prolonged, depressed trading range and move to new near-term highs above $117.50 per share – and the tremendous upward surge in share price momentum has inspired me to raise my outlook for BABA shares to a new “buy” rating:

For the quarterly period ending in June, it became clear that e-commerce industry peers like Pinduoduo and JD.com have risen (both in terms of influence and prominence) as Alibaba fell short of consensus estimates in earnings and revenue. On the revenue side, Alibaba posted just over $34 billion (while $35.2 billion was expected), which indicates annualized growth rates of 4%. Net income figures came in just under $3.43 billion (while $3.8 billion was expected) and this is the more problematic side of the equation because this indicates changes of -29% on an annualized basis.

At this stage, it is quite clear that expanding challenges from newer players in the e-commerce space have taken their toll as Alibaba recovers from the significant reorganization upheavals that occurred toward the end of 2023.

The company’s e-commerce segment in mainland China consists of T-Mall and Taobao, and this segment continued revenues of $16.01 billion (indicating an annualized change of -1% for the period). Fortunately, gross merchandise transaction figures from these businesses did see growth rates above 10%. As a result, it is clear that these two platforms are still receiving large amounts of visitors and traffic, even though this might not be inherently obvious when looking at the raw revenue figures alone.

Much more encouraging were the growth figures from the shopping segments focusing on international customers. Specifically, AliExpress and Lazada were far better performers during the quarter, and the segment posted total growth rates of 32% on an annualized basis.

Going forward, I do expect the market to start centering a bit more of its attention on the company’s cloud computing segment (Alibaba Cloud). In this portion of the business, Alibaba generated $3.74 billion during the most recent reporting period (indicating annualized growth rates of 6%). But while these numbers might not seem significant when compared to similar cloud-based performances seen with U.S. competitors (such as Amazon Web Services, for example), it should be noted that this is still the most substantial rate of growth that we have seen from this segment since the middle of 2022. Ultimately, this performance does suggest that Alibaba Cloud might have the potential to be one of the most attractive long-term drivers of growth for the company going forward, and this will be the segment that I watch most closely when the next earnings report is released for the current quarter.

Until then, it will be critical to watch new price action as it develops within the BABA price charts. To get a sense of where we currently stand, we must first look back at the volatile price moves that have characterized BABA share price activity since October 2020 (shown in the first price chart). More recently, an upward surge in share prices has been inspired by broader bull trends in Chinese stock markets and BABA stock has now broken three important significant resistance levels. First was the May 17th, 2024 high at $90.46, next was the July 31st, 2023 high at $102.50, and then finally BABA share prices managed to breach resistance found near the March 30th, 2023 highs at $105.05. Not surprisingly, all of this bullish price activity sent the stock into overbought territory on September 23rd, 2024 and the readings in the daily relative strength index ultimately reached highs of 82.99 on October 1st, 2024. Remember, any readings in the relative strength index that post over the 70 level are considered to be overbought, so readings near the 83 mark are actually quite over-extended. As a result, the probability for a more significant downside pullback in BABA share prices has become much more likely, and it will be important for investors to identify key support levels for this stock that might be sufficient for new long positions.

In this regard, I prefer to use Fibonacci retracement studies so that I can identify potential downside retracement areas that might benefit from possible price support. In the chart above, I have outlined the dominant price move starting from the June 28th, 2024 lows of $72.56 and then extending this bullish price wave to the $117.82 highs from October 7th, 2024. In this example, we can see that share prices have already broken through the 23.6% Fibonacci retracement (which is located just above $106.80 per share). Now that this initial break had already occurred, the next Fibonacci target to the downside would be found at the 38.2% retracement level (currently located near $100.20 per share). As we can see, this 38.2% Fibonacci retracement zone also coincides quite closely with the $100 psychological level, and I think these combined factors have the potential to work together and create a viable support zone for BABA shares going forward.

In order to reverse this positive outlook for the stock, I would need to see share prices break through critical support levels found at $89.50. Essentially, this price zone marks the 61.8% Fibonacci retracement of the aforementioned price move, as well as the price high from September 20th, 2024 (which would now be expected to work as a support zone).

Additional risks for long trades include the fact that recent stimulus packages from the Chinese government might have already been priced into the market, and multiple chart gaps have developed during this most recent run higher in Alibaba share prices. Upward price gaps will often need to be filled to the downside once the stock moves back into those specific price regions, so there is an additional possibility that BABA share prices could see an increase in downside momentum in the event that this activity begins to occur. Finally, it should be noted that there is often an element of added geopolitical risk when trading in stocks in this geographical region, and it is my firm belief that this external risk is likely what led to the major price declines in BABA share prices from 2020 to 2023. Given the fact that the stock was able to form a long-term base near $70 per share, I feel confident enough to initiate new bullish positions in this stock as long as strict stop-loss measures are used and proper risk management techniques are implemented. As of now, my recommendation for this stock is to buy a pullback into the $100.20 support zone, with a stop-loss placed below $89.50 per share.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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