“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, January 07, 2019

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

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"Trading Capital Management"



Option Trade – Alibaba Group Holding Ltd (NYSE:BABA) Calls

Wednesday, January 09, 2019

** OPTION TRADE: Buy the BABA APR 18 2019 165.000 CALL at approximately $4.70. Place a pre-determined sell at $9.40.

Also include a protective stop loss of $1.90.

The Chinese e-commerce goliath Alibaba Group Holding Ltd (NYSE:BABA), an online and mobile commerce company, has reached a bargain level after the Chinese economy lost momentum, as President Trump’s tariffs continue to take a toll on it. Since June, Alibaba stock has tumbled about 30%, making its valuation quite reasonable, especially given BABA’s multiple businesses which are poised to benefit from strong, continuous growth trends.

And now, with all eyes looking to the result of the vice-ministerial-level trade talks that were had on Monday and Tuesday in Beijing, it's not terribly surprising to see the beaten-down shares of this promising Chinese company to rally again on a favorable outcome.

BABA should continue to benefit from the strong, continuous megatrends of e-commerce and cloud computing. Meanwhile Wall Street analysts remain bullish on BABA, as their average price target on BABA stock is $213, representing upside of about 50% from the shares’ current levels.

About Alibaba Group…..

Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in the People's Republic of China and internationally. The company operates in four segments: Core Commerce, Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives and Others.

Past Performance…..

Alibaba Group last posted its quarterly earnings data on Friday, November 2nd. The specialty retailer reported $1.01 earnings per share (EPS) for the quarter, beating the Thomson Reuters’ consensus estimate of $0.82 by $0.19.

The business had revenue of $12.40 billion for the quarter, compared to the consensus estimate of $12.51 billion. Alibaba Group had a net margin of 19.33% and a return on equity of 12.99%. The company’s revenue was up 49.6% compared to the same quarter last year. During the same period last year, the firm posted $1.29 earnings per share. On average, research analysts forecast that Alibaba Group Holding Ltd will post 3.48 EPS for the current year.

Future Earnings…..

Equities analysts expect that Alibaba Group will post $1.64 earnings per share for the current quarter, Zacks Investment Research reports. Alibaba Group posted earnings per share of $1.63 in the same quarter last year, which suggests a positive year over year growth rate of 0.6%. The company is expected to issue its next quarterly earnings results on Thursday, February 7th.

Moving Forward…..

China's Alibaba Group Holding has acquired German data analysis firm Data Artisans, the Berlin-based startup said, in a deal reported to be worth around 90 million euros ($103 million).

The transaction marks the first full takeover by a Chinese company on Berlin's growing startup scene. In the last significant deal, Alibaba's rival Tencent Holdings participated in a $160 million funding round for online bank N26 in March 2018.

Data Artisans CEO Kostas Tzoumas said Alibaba would also invest an undisclosed sum in the company to develop Apache Flink, its open-source software that can process large data volumes, and to expand into new business areas.

The price of the deal was reported to be 90 million euros in the media, including German newspaper Handelsblatt.

Also, Alibaba’s Ant Financial subsidiary is in talks to acquire British payment company WorldFirst. A deal could value WorldFirst at more than $700 million, according to the report.

WorldFirst was founded in 2004. It’s headquartered in London and operates offices around the world. WorldFirst mostly handles payments and currency exchanges for businesses and individuals.

Influencing Factors…..

BABA’s e-commerce platforms continue to grow at a solid pace. In the third quarter, the segment’s revenues jumped 56% year-over-year to $10.5 billion. The number of consumers who used the platform during the previous year jumped 25 million versus Q2 to a total of 601 million. Finally, the unit’s mobile MAUs (Monthly Active Users) surged 32 million to 666 million.

One key to BABA’s growth has been its major investments in Taobao, its primarily consumer-driven, e-commerce website. The website’s user interface has been revamped, making it easier for merchants and consumers to use it. Taobao has also increased its use of artificial intelligence and has improved its recommendation feed. Another one of Alibaba’s consumer-driven, e-commerce websites, Tmall, has also been improved.

Long-term, continuous positive catalysts should drive BABA’s e-commerce revenue higher, lifting BABA stock. These catalysts are expected to boost China’s e-commerce spending from $470 billion in 2018 to $839.54 billion by 2021.

BABA has emulated Amazon’s (NASDAQ:AMZN) expansion into the lucrative cloud- computing market. So far, it’s been a big-time winner for BABA. In Q3, the unit’s top line soared by 90% year-over-year to $825 million.

BABA has the advantage of hosting large numbers of merchants, which has been a critical factor in its development of hosting infrastructure. The company has also been investing heavily in adding new features to its cloud offerings. In fact, it added over 600 new features in Q3, including enhancements related to big data analytics, security, Internet-of-Things, and AI.

The slowing of the Chinese economy will definitely weigh on BABA’s growth. But it does look like much of that reduced growth has already been baked into BABA stock. Keep in mind that the forward price-earnings multiple of Alibaba stock is 20.

Alibaba Group‘s stock had its “buy” rating restated by equities researchers at Mizuho in a research note issued on Thursday, December 13th. They currently have a $200.00 price objective on the specialty retailer’s stock. Mizuho’s target price suggests a potential upside of 43.11% from the stock’s current price.

Several equities analysts have recently commented on the company…..

  • MKM Partners lowered their price target on shares of Alibaba Group to $270.00 and set a “buy” rating on the stock in a report on Wednesday, September 12th.
  • HSBC initiated coverage on shares of Alibaba Group in a report on Wednesday, September 12th. They set a “buy” rating on the stock.
  • Zacks Investment Research raised shares of Alibaba Group from a “strong sell” rating to a “hold” rating in a report on Tuesday, September 18th.
  • CLSA set a $240.00 price target on shares of Alibaba Group and gave the stock a “buy” rating in a report on Monday, September 24th.
  • Goldman Sachs Group increased their price target on shares of Alibaba Group from $241.00 to $247.00 and gave the stock a “buy” rating in a report on Wednesday, October 3rd.
  • ValuEngine raised shares of Alibaba Group from a “sell” rating to a “hold” rating in a research note on Monday, October 22nd.
  • Finally, Benchmark dropped their price objective on shares of Alibaba Group from $220.00 to $205.00 and set a “buy” rating for the company in a research note on Monday, November 5th.

One equities research analyst has rated the stock with a sell rating, one has issued a hold rating, twenty-six have given a buy rating and two have issued a strong buy rating to the company’s stock. The stock currently has an average rating of “Buy” and a consensus price target of $213.35.

Summary

BABA has a quick ratio of 1.42, a current ratio of 1.42 and a debt-to-equity ratio of 0.26. The company has a market cap of $357.92 billion, a price-to-earnings ratio of 36.42, a PEG ratio of 1.29 and a beta of 2.24. Alibaba Group Holding Ltd has a 52-week low of $129.77 and a 52-week high of $211.70.