Option Trade 
Alibaba Group Holding Ltd (NYSE:BABA) Calls
Wednesday, 10th August, 2016

** OPTION TRADE: Buy the BABA OCT 21 2016 90.000 call at approximately $2.05. Place a pre-determined sell at $4.10.

Note: No protective stop losses added -- but if you wish to do so make it $0.80.

by Ian Harvey

August 10, 2016

Alibaba Group Holding Ltd (NYSE: BABA), an online and mobile commerce company, is expected to report earnings tomorrow, Thursday, August 11, before market open, and Wall Street is expecting solid year-over-year results. Wall Street expects Alibaba to generate healthy revenues amid increased focus on mobile; analysts reaffirm a bullish stance on the stock ahead of quarterly earnings.

Wall Street analysts largely expect Alibaba to report 22-23% gross merchandise volume growth given its management said June quarter GMV growth would be on par with the March quarter growth of 23.7% at its mid-June analyst day. The street sees revenue at Alibaba growing by 50% to 30 billion yuan ($4.5 billion). Alibaba can grow its revenue faster than transactions conducted on its sites thanks to higher take rates.

T.H. Capital‘s Tian Hou this morning said that Alibaba can beat street estimates on the top line. According to China’s National Bureau of Statistics, online retail sales in the second-quarter re-accelerated to 28.5% from a year ago, compared to 27.8% in the first-quarter. In other words, Alibaba’s management may have been conservative and wanted to manage expectations.

Hou wrote:

”Street expectation of RMB30.0B (US$4.5B) and highly likely to be better due to: 1) better commission revenue driven by accelerating Tmall GMV growth and higher commission rate in the June quarter. Based on our data, total GMV transacted on BABA domestic retail marketplaces is likely to increase 24% Y/Y to RMB833B, of which GMV from Tmall is likely to grow 37% Y/Y to reach RMB338B and GMV from Taobao is likely to grow 16% Y/Y to reach RMB495B in F1Q17. Commission rate for Tmall is likely to grow to 2.11% in F1Q17 from 2.04% in F1Q16. Higher Tmall GMV and commission rate will lead to better commission revenue growth at 42% Y/Y to reach RMB7.12B in F1Q17.”

Hou raised her price target for Alibaba substantially to $97, from $84 previously. Alibaba closed at $85.24 on Tuesday.

Shares are up 7% in the last three months in anticipation of an upbeat performance by the company’s platforms, despite rough macroeconomic conditions across the globe. For the quarter ended June 30, Alibaba is expected to generate earnings of $0.62 per share on revenue of $4.53 billion, up from $3.26 billion in the same period last year.

Alibaba Group Holding Ltd. has a 12 month low of $57.20 and a 12 month high of $86.42. The stock has a 50 day moving average of $81.39 and a 200-day moving average of $76.22. The company has a market cap of $212.70 billion and a P/E ratio of 20.30.

Why Alibaba?

Although China’s economic growth rate has decreased, the company was able to increase revenue last quarter to 39% year-over-year. However, the continued slowdown could still affect GMV this quarter. Even so, Alibaba expects to hit $1 trillion in GMV by 2020 and reach 2 billion customers in the process.

Recently, Alibaba has been working extensively to expand its international presence. As part of this initiative, it plans on opening its first office in Melbourne, Australia, by the end of this year. Its rival JD.com has been eating at Alibaba’s market share due to its reputation as a vendor for foreign electronic goods.

Alibaba is expanding into other fields, notably teaming up with SAIC Motor to explore the connected car space. According to a CNBC report in July, the two will soon launch an SUV powered by Alibaba’s operating system, YunOS. Furthermore, Alibaba is investing in e-sports through its new partnership with the International e-Sports Federation, and plans to build multiple stadiums in China for e-Sports events.

Alibaba is also putting more money into its cloud services and payment platform, Alipay, which face competition from Tencent and other smaller companies.

Analyst Input

RBC Capital analyst Mark Mahaney remains bullish on the Alibaba Group Holding Ltd, reiterating a Buy rating with a price target of $105, marking a 23% increase from where the stock is currently trading.

Mahaney explains, “China Macro is a concern, but Internet Secular trends can offset much of this. Cloud Computing is small for BABA, but showing great growth. We still view BABA as a Premium-Growth/Premium-Profit Asset, with a very reasonable valuation. We also view this as a very effective management team with a sound l-t strategy. Finally, we see BABA as having significant option value in terms of non-retail/platform revenue streams in China, possibly International expansion & a series of major strategic investments.”

Also, analyst Rob Sanderson of MKM Partners gave his take on Chinese e-commerce giant Alibaba Group Holding Ltd (NYSE:BABA) ahead of its fiscal first-quarter earnings next Thursday, August 11. Sanderson is expecting to see a solid report that shows user growth and increases in monetization.

Sanderson points to several developments that are causing him to be bullish towards Alibaba. First, big data is allowing for better targeting, conversion and return on investment for Alibaba. It reported that its conversion rates for performance marketing have increased from 30% to 80%, crediting this to smarter segmentation.

A major factor for the Chinese when it comes to decisions is recommendations from friends and family. Taobao, Alibaba’s online shopping platform, has experienced such incredible growth because Alibaba has leveraged this characteristic and made the website into a social commercial platform.

Sanderson is “impressed by BABA’s dominant ecosystem and management’s ability to execute long-term goals.” He also thinks that the company has an “excellent platform, a strong track record and is investing in ripe areas.”

The analyst maintained his Buy rating with a price target of $95, marking a 13.5% increase from current levels.

As well, Baird’s top analyst Colin Sebastian weighs in on Alibaba Group Holding Ltd, seeing AliCloud becoming a real competitor in North America.

Alibaba’s cloud service is currently the single largest public cloud vendor in China. The service boasts more than 2.3 million users and offers more than 70 cloud services across computing, storage, databases, analytics, networking, messaging, machine learning and mobile.

Alibaba maintains an approximate 45% market share in China and international market growth is expected to become increasingly important, according to Sebastian. The closest international substitute to AliCloud is Amazon’s AWS.

AliCloud maintains a home court advantage in China, with governmental policy allowing for the company to take advantage of domestic leverage. The analyst explains that cloud computing is of ever-increasing importance to China and also affirms that there is room for a largely successful AliCloud. The analyst maintains that many investors undervalue AliCloud’s long-term market opportunity and potential. In his words, “While we continue to expect Amazon to remain the clear market leader, and Microsoft and Google are serious contenders, we see AliCloud as a legitimate up-and-comer, and with a relatively clear path for revenue growth and profitability. On the margin, a more aggressive AliCloud could add some pricing pressure in western markets.”

The analyst reiterates an Outperform rating for BABA with a price target of $94.00.

Also, several other equities research analysts have recently commented on the company.

• Deutsche Bank AG reiterated a “buy” rating and set a $110.00 target price on shares of Alibaba Group Holding in a research report on Friday, June 17th.

• Jefferies Group boosted their target price on shares of Alibaba Group Holding from $86.00 to $101.00 and gave the company a “buy” rating in a research report on Friday, July 22nd.

• SunTrust Banks Inc. reiterated a “buy” rating and set a $90.00 target price on shares of Alibaba Group Holding in a research report on Thursday, June 30th.

• Finally, Zacks Investment Research upgraded shares of Alibaba Group Holding from a “strong sell” rating to a “hold” rating in a research report on Tuesday, July 5th.

One analyst has rated the stock with a sell rating, seven have issued a hold rating and twenty-seven have given a buy rating to the stock. The stock currently has a consensus rating of “Buy” and a consensus price target of $94.74.

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 OCT 21 2016 90.000 call at approximately $2.05. Place a pre-determined sell at $4.10.

Note: No protective stop losses added -- but if you wish to do so make it $0.80.

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