Option Trade 
Alibaba Group Holding Ltd (NYSE:BABA) Calls 
Friday, January 20, 2017

** OPTION TRADE: Buy the BABA 21 2017 100.000 call at approximately $3.60. Place a pre-determined sell at $7.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.45.

by Ian Harvey

Friday, January 20, 2017

Alibaba Group Holding Ltd (NYSE:BABA), an online and mobile commerce company, has seen its shares lift higher the past couple weeks. And based on what is continuing to be seen, both off and on the BABA price chart, that outperformance isn't finished and supports positioning with an options trade.

As we are all aware Donald Trump will be President of the United States as of today. And it is a common fact that Trump is not a fan of China that adheres to "currency management practices" which promotes a weaker yuan, and in turn a stronger dollar, which makes U.S. goods uncompetitive. But on the other-hand that means more for BABA stock than is probably realized - as a bullish investment.

Once Trump begins negotiating "great trade deals" with China, he may turn to his "new" ally and Alibaba CEO Jack Ma who recently proposed 1 million jobs in five years in the U.S.

Chairman Jack Ma met with Trump last week, outlining an effort to enable small U.S. businesses to sell products through the Chinese e-commerce site's platforms, which the company said would "create 1 million U.S. jobs" over the next 5 years.

The initiative, Alibaba said, would help small businesses and farmers sell to China's growing middle class of 300 million people. It comes as Trump has threatened to crack down on what U.S. trade relations with China that he argues benefit the latter nation.

Secondly, and counterfeit concerns aside, the massive online retailer stands to benefit if Trump gets what he wants, namely a weaker dollar. If the foreign exchange relationship does reverse direction, this helps a China ADR like BABA as Renminbi-based profits are translated into the U.S. denominated ADR.

Also, given a BABA price chart that continues to look supportive, Alibaba looks to trump any other potential negatives such as the company's spending on content acquisition or recent investor disappointment Alibaba didn't guide higher following a strong Singles' Day.

Alibaba Group Holding Limited has a 12-month low of $59.25 and a 12-month high of $109.87. The firm has a 50-day moving average of $91.41 and a 200-day moving average of $94.57. The company has a market cap of $236.72 billion, a PE ratio of 51.03 and a beta of 2.68.

Factors to Consider

1.       Alibaba, created as a business-to-business marketplace in 1999, is now the world’s largest merchant; it’s not just the largest e-commerce player, but a commerce enabler bigger than Wal-Mart Stores, Inc. (NYSE:WMT).

Alibaba is also a bet on the Chinese middle class. China’s consumers are hard-working, hungry for value and conservative in the best possible way. That’s because they’re all first-generation middle class. They treasure their new status, they’re very supportive of stability, and since they’re Chinese they’re numerous. The Chinese middle class is due to become larger than America’s very soon, and even when China’s GDP equals that of the U.S., its people will still be just one-third as wealthy.

2.       China may not get to host the Beijing Olympic Winter Games until 2022 but one of the countries' largest companies is looking to get close to the International Olympic Committee (IOC) before the games are brought to mainland China.

E-commerce giant Alibaba (BABA)  announced Thursday, Jan. 19, it had signed a 12-year partnership with the International Olympic Committee (IOC) through 2028.

The three-part digital partnership, unveiled at the Davos Economic Forum in Davos, Switzerland by Alibaba founder Jack Ma and IOC President Thomas Bach, will allow Alibaba to provide an assortment of cloud services, a global e-commerce platform and digital media technologies to the IOC.

The strategic partnership between Alibaba and IOC also means Alibaba will create a new global e-commerce platform to carry Olympic-licensed products manufactured by the Olympic parties' official licensees, which could be the company's first step of a long-term foray into sports marketing.

Alibaba will also attain rights including the advertising and promotional use of Olympic marks and imagery from the Olympic Games as well as marks from the National Olympic Committees.

3.       Alibaba spent this past year consolidating its financial position. During the first nine months of the year, Alibaba delivered $8 per share in earnings. Cash flow averaged $8 billion per quarter. Debt rose 60%, but that was in line with assets, and in general debt levels are going down.

4.       The company is as more interested in self-driving cars than Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), it is a bigger factor in domestic media than Apple Inc. (NASDAQ:AAPL), and it may be better at getting artificial intelligence to market than International Business Machines Corp. (NYSE:IBM).

5.       Founder Jack Ma doesn’t even want to talk about e-commerce. Computers, he says, are just one way to get things from here to there. He’s into eliminating all forms of market friction, and when Chinese consumers want to buy imports Alibaba is enabling it.

6.       While U.S. media outlets are talking about Jack Ma’s tie-up with Steven Spielberg, the company is also investing in Chinese media companies. Don’t think of it as a movie studio or TV outlet; think of it as Netflix, Inc. (NASDAQ:NFLX). That is its new model.

7.       You will start to see just how strong Alibaba is as it moves beyond its Chinese base with the acquisition of Singapore’s Lazada Group and the expansion of its Aliyun Cloud into Japan. These moves put it on a collision course with Amazon, which is expanding its own services into Southeast Asia through India, and which has been serving Japan with cloud since 2011.

8.       Alibaba employees are hard-working, dedicated and have a track record of getting it done. MKM Partners says BABA stock should be worth $130 per share by the end of 2017. 

9.       Alibaba Group Holding has a big year ahead with the IPO of its finance arm, Ant Financial. Currently, Ant Financial’s payment service, Alipay, is baked into Alibaba stock, not reflecting its true value. As the IPO gets closer, and more information is disclosed, the value of Ant Financial will drive BABA stock significantly higher. Following the IPO, Alibaba Group Holding will still own the majority in Ant Financial, and because the two services intertwine, BABA is likely to partake in Alipay earnings following the IPO.

Analyst Input

Alibaba Group Holding Ltd.‘s stock had its “buy” rating restated by analysts at HSBC in a research report issued on Thursday. They currently have a $120.00 price objective on the stock. HSBC’s price target indicates a potential upside of 24.78% from the company’s previous close.

Also, Alibaba was upgraded by analysts at Vetr from a “buy” rating to a “strong-buy” rating in a report released on Monday. The brokerage presently has a $107.83 price target on the stock. Vetr‘s target price would indicate a potential upside of 12.01% from the stock’s previous close.

Alibaba Group Holding Limited has received a consensus recommendation of “Buy” from the thirty-two ratings firms that are presently covering the firm. Four equities research analysts have rated the stock with a hold recommendation, twenty-seven have assigned a buy recommendation and one has assigned a strong buy recommendation to the company. The average 1-year price objective among brokers that have updated their coverage on the stock in the last year is $118.95.

Harvey’s Options Volatility Indicator


Currently, and with Alibaba stock near $96.17, BABA is positioned within a small bull-flag pattern that's established itself above all key moving averages. As such, and with earnings next week, the expectation is for an upside breakout.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the BABA APR 21 2017 100.000 call at approximately $3.60. Place a pre-determined sell at $7.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.45.

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