Option Trade 
Alibaba Group Holding Ltd (NYSE:BABA) Calls 
Tuesday, 3rd May, 2016

** OPTION TRADE: Buy the BABA Jul 2016 75.000 call at approximately $4.50. Place a pre-determined sell at $9.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.80.

by Ian Harvey

May 03, 2016

Alibaba Group Holding Ltd (NYSE: BABA), an online and mobile commerce company, is expected to report earnings Thursday, May 5, before market open, and Wall Street is expecting solid year-over-year results. Analysts expect the company to report earnings of $0.56 per share, marking a 22% year-over-year increase. Analysts also expect the company to post quarterly revenues of $3.5 billion, up from $2.8 billion posted in the same quarter of last year.

In the most recent quarter, the Chinese e-commerce giant posted 393 million monthly active users. Analysts will be looking to see an increase in the company’s user base as the company handles more business than other e-commerce company. Analysts will also be looking for an increase in the company’s gross merchandise volume; a key metric for all e-commerce platforms.

BABA stock is currently pulling back from overbought levels, and options are pricing in a respectable post-earnings move. This sets the stage for options traders looking to get in ahead of the event.

Looking at the numbers, Wall Street is looking for Alibaba earnings to rise 21% to 56 cents per share in fourth quarter. Revenue, meanwhile, is seen gaining 32.6% to $3.56 billion.

The stock has a market capitalization of $188.20 billion and a PE ratio of 18.65. Alibaba Group Holding has a 12-month low of $57.20 and a 12-month high of $95.06. The stock’s 50 day moving average is $77.61 and its 200 day moving average is $75.68.

Interestingly, Alibaba has managed to beat Wall Street’s expectations over the previous four quarters. And this is despite competition from the likes of JD.com. Furthermore, Alibaba’s gross trading volume shows that this is an ambitious company with solid numbers. Alibaba tripled their trading volume from one trillion yuan to 3 trillion yuan or about $475 billion in just 4 years (2012-2016). And these figures are coming from a company which was founded 17 years ago.

When we consider that Alibaba controls more than an estimated 80% of the Chinese e-commerce market, and China’s consumer spending has shot up by 10.7% in March, Alibaba is well-placed for continued growth. This can be achieved by the following --

• Alibaba’s e-commerce business aside, they continue to establish new growth opportunities. For instance, Alibaba is urgently pushing its cloud platform with the realization that this is a growing market and one they stand to profit from in the long-term.

• The Chinese e-commerce powerhouse spreads risk by serving the B2B, B2C and consumer to consumer segments. As a result, not only are they able to generate revenue from these multiple streams, but they are able to lower the risk, and are stronger as a result of this. For instance, if the B2B market is weak one-quarter, they can rely on their other market segments.

• Alibaba has plenty of growth opportunities, notably, despite the fact that China has one of the world’s strongest economies; it still has hundreds of thousands of villages which haven't yet been fully exposed to e-commerce. Penetration in this “ripe” market segment requires trust in e-commerce and widespread internet access. Fortunately, these two factors are on the rise in China.

• E-commerce is fairly widespread in the West; however, this isn’t the case in the East. In a letter to shareholders last year, Alibaba CEO, Jack Ma, stated that e-commerce accounts for just 9% of retail spending in China. Therefore, the opportunity for growth in China alone is huge.

• Then we move on to the West. Alibaba is popular among Western wholesalers as a source of getting good products at reasonable prices.

• And like many other tech giants, Alibaba is making significant investments into virtual reality technology.

The brokerage community remains solidly bullish on Alibaba stock. According to data from Thomson First Call, 32 of the 37 analysts following BABA rate the stock a buy or better, compared to four holds and just one sell rating. The 12-month consensus price target of $91.06 represents a healthy premium of 20%, but there is room for potential upward revisions following a solid report.

Needham & Co. analyst Kerry Rice initiated a Buy rating on the stock with a price target of $95.00 on April 14, 2016. The analyst commented, “We view Alibaba as the best in class e-commerce marketplace that not only serves as a tollgate to merchants and brands that desire to reach the 1.4B Chinese consumers, but also extends their reach around the world.” Rice further elaborated, noting “The results of our survey suggest that Chinese consumers spend the most time and money on Alibaba sites and both are expected to increase over the next year.”

Harvey’s Options Volatility Indicator

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

** OPTION TRADE: Buy the BABA Jul 2016 75.000 call at approximately $4.50. Place a pre-determined sell at $9.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.80.

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