by Ian Harvey
June 10, 2017
Blasting past expectations, the Alibaba call option trade placed by our Armchair Trader members on May 16 yielded a much higher gain than anticipated.
One philosophy behind our Armchair Trader membership is that there is very little need for monitoring of trades once they have been placed – “Set it and forget it.” Option trades are placed with a pre-determined sell price, which means that once the target increase has been reached, the option will be sold at the first available price.
In the case of the Alibaba Group Holding Ltd (NYSE:BABA) Call trade recommendation sent to Armchair Trader members on May 16, 2017, the first available price that was obtainable after surpassing the target price exceeded that price by an incredible amount.
Between May 18 and June 7, the price hovered between $5.90 and $6.80, having up to then failed to reach its target price for our traders. On June 8, however, the opening price was a whopping $17.20, translating to a profit of 291%.
Things Played Out
Relative to the headline numbers, Alibaba earnings were mixed. For Q4, total revenue grew 60% year-over-year to $5.6 billion. The revenue growth figure beat Street estimates by some nine points. Earnings per share, however, were 2 cents short of analyst consensus, even while increasing 45% to 63 cents.
It appears, however, that the “miss” on EPS occurred due to higher-than-expected taxes and a doubling of a loss from equity investees. Alibaba earnings were hit by a higher effective tax rate: 23% on a non-GAAP basis, against 14% the year before. Adjusted Ebitda of RMB 16.6 billion actually was a full RMB 1 billion ahead of expectations on that front.
May 26, 2017 – more info on earnings
A week after Alibaba Group Holding Ltd (NYSE:BABA) announced its Q4 2017 earnings most BABA stock investors had digested its results which included 60% and 38% growth year-over-year for revenue and non-GAAP net income, respectively.
Investors didn’t like the fact that it missed analysts’ adjusted earnings-per-share estimate of $0.65 by 2 cents, sending Alibaba stock down more than 5% during trading on May 18, only to turn positive by the end of the day.
From May 16 (time of option purchase at 4.40) until June 08 – little change on option price
June 08 – why the sudden jump in price? (Option opened at 17.20 due to following info – a profit of 291%)
Why the Sudden Jump?
On June 8, Alibaba Group Holding Ltd (NYSE:BABA) rocketed higher based on an eye-popping announcement from an investor event in the morning. Alibaba is forecasting its largest quarterly increase in revenues since its 2014 IPO — 45% to 49%, up to $34.3 billion, for this year, fiscal 2018 — which had BABA stock up by double digits (10.2%) in premarket trade.
This forecast of massive revenue growth implies sales of up to $34.3B, and elicited gasps of "wow" from investors at an event in Hangzhou.
The guidance puts Alibaba, which in May recorded its biggest quarterly rise in revenues since its blockbuster IPO in 2014, on track for its biggest underlying rise so far, said CFO Maggie Wu.
The trade was given as follows with the rationale presented below;
** OPTION TRADE: Buy the BABA JULY 21 2017 125.000 CALL at approximately $4.40. Place a pre-determined sell at $9.00.
Alibaba Group Holding Ltd (NYSE:BABA), an online and mobile commerce company, reports before the market open Thursday, for its fiscal fourth quarter.
The analyst consensus looks for Alibaba to report revenue of $5.2 billion, or 35.87 billion yuan, up 48% in local currency from the year-ago quarter. The consensus on adjusted earnings is 66 cents, up 50% in local currency.
Needham analyst Kerry Rice has a buy rating on Alibaba and price target of 135, up from a recent target of 125. Rice thinks two factors could drive an upside to Alibaba expectations. One is that China e-commerce retail sales accelerated in the first quarter and that an increasingly personalized user experience should result in higher sales.
Alibaba follows the earnings of JD.com (JD), its closest rival in the e-commerce field. JD.com topped estimates and guided second-quarter revenue above views.
Last quarter, the Chinese e-Commerce giant delivered a positive earnings surprise of 28.24%.
For the last year, shares of Alibaba Group have been steadily treading higher. The stock returned 51.7% compared with the categorized Electronic Commerce industry's gain of 43.2%.
Alibaba Group Holding has a 12 month low of $73.30 and a 12 month high of $121.49. The stock has a market cap of $301.68 billion, a PE ratio of 55.89 and a beta of 2.73. The firm has a 50 day moving average price of $112.85 and a 200-day moving average price of $101.45.
Influencing Factors to Consider
Alibaba's third-quarter fiscal 2017 earnings of $1.09 per share exceeded the Consensus Estimate. Solid growth in its core e-commerce business and growing cloud computing services led to better-than-expected results. Management expects these factors to continue driving results for the upcoming quarter.
Revenues also increased sequentially as well as year over year. The increase was driven by continued revenue growth in China's commerce retail business and the consolidation of newly acquired businesses (namely Youku Tudou and Lazada).
The Chinese e-Commerce company, which operates as a platform for third-party sellers, neither sells goods directly to merchants nor holds inventory. Alibaba Group's strong market position in China, uninterrupted growth in mobile business, unfazed improvement in commerce retail business and improving gross merchandise value should boost fiscal fourth-quarter earnings.
Additionally, Alibaba is expected to continue witnessing an increase in monetization rates. The company is building its online marketing inventory on both mobile and PC. Also, due to higher monetization rate, the company's profits are expected to increase.
Analysts and Hedge Funds Opinions
Analyst Kerry Rice of Needham & Co. raised its price target for the Chinese e-commerce company to 135 from 125, keeping a buy rating, on optimism about its fiscal Q4 results to be announced before the open on May 18.
In his report, Kerry said that while Alibaba was traditionally transaction-focused, "we believe it is increasingly becoming a technology solution provider in areas such as marketing, data analytics, logistics operation, and cloud computing."
Barclays PLC lifted their price target on shares of Alibaba Group Holding from $130.00 to $132.00 and gave the company an “overweight” rating in a report on Wednesday, May 10th.
Robert W. Baird reaffirmed a “neutral” rating and set a $37.00 price target on shares of Alibaba Group Holding in a report on Wednesday, January 25th.
Shares of Alibaba Group Holding Ltd have earned a consensus recommendation of “Buy” from the thirty-five brokerages that are currently covering the stock.
One analyst has rated the stock with a sell recommendation, two have issued a hold recommendation, twenty-six have assigned a buy recommendation and two have issued a strong buy recommendation on the company. The average 1-year target price among brokers that have covered the stock in the last year is $125.93.
Reliance Trust Co. of Delaware raised its stake in Alibaba Group Holding by 31.5% in the first quarter. Reliance Trust Co. of Delaware now owns 10,216 shares of the specialty retailer’s stock valued at $1,101,000 after buying an additional 2,448 shares during the last quarter.
Harvey’s Options Volatility Indicator
An earnings beat is very much on the cards and the stock is trading at an all-time high going into the earnings release.
The stock is expected to continue its northward march after the earnings. The Options data also suggests traders are betting on more upside from here. BABA stock looks set to fly higher after the earnings.
To Sum Up on this Winner
All the odds were in our favor, and despite an apparent shortfall immediately following the earnings report, it is great to see our Armchair Trader members score an even better than anticipated gain, just by sitting back and following a simple and effective method. While it is always wonderful to have these big increases, mostly success is slow and steady, with ‘modest’ increases of around 100%, and obviously a few losses along the way. Keep your eyes on the big picture, and let’s keep moving onward and upward.