Option Trade
Alibaba Group Holding Ltd (NYSE:BABA) Calls
Tuesday, August 15, 2017

** OPTION TRADE: Buy the BABA SEPT 15 2017 155.000 CALL at approximately $6.60. Place a pre-determined sell at $13.20.

Note: No protective stop losses added -- but if you wish to do so make it $2.65.

Also 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

by Ian Harvey   

The Chinese e-commerce goliath Alibaba Group Holding Ltd (NYSE:BABA), an online and mobile commerce company, will report earnings Thursday, August 17, 2017, before the market opens. The consensus earnings estimate is $0.92 per share on revenue of $7.02 billion and the Earnings Whisper number is $0.96 per share.

Overall, it's been an outstanding year for BABA stock, which has tacked on 76% year-to-date and hit a new record high of $160.39 on July 27. The shares have outperformed the broader S&P 500 Index (SPX) by more than 21 percentage points during the past three months.

Alibaba stock is currently up 2% to trade at $154.25, after Dan Loeb's Third Point re-initiated a stake with 4.5 million shares of the Chinese e-commerce concern in the second quarter. "We believe now is the time to own Alibaba again," wrote the hedge fund. "Alibaba is currently at a positive inflection point after rolling out significant changes over the past year to its advertising platform, which currently generates the majority of the company’s revenue."

The Chinese e-commerce goliath caters mainly to its native market. It operates as a platform for third-party sellers. It neither sells goods directly to merchants nor holds inventory.

According to the China's National Bureau of Statistics, online retail sales growth accelerated to 41% y/y in June from 30% y/y in May. In fact, this is the highest growth rate since 2016. E-commerce penetration reached 18.6% in June 2017, 390 bps higher than June 2016. This acceleration obviously bodes well for BABA.

Also, the June 2017 Analyst Day, BABA provided strong FY18 revenue growth guidance, which further increases market expectations.

Alibaba Group Holding Limited has a one year low of $86.01 and a one year high of $160.39. The stock has a market cap of $391.16 billion, a P/E ratio of 61.18 and a beta of 2.64. The firm has a 50-day moving average price of $150.14 and a 200-day moving average price of $123.15.

Influencing Factors

Alibaba has a huge (nearly 80%) share of the Chinese e-commerce market, one of the largest markets globally, and a market where consumers are increasingly turning to online channels to purchase quality products and global brands. China is Alibaba’s greatest strength and serving the Chinese customer is what has taken the company to the top. The company has been witnessing top-line growth of more than 40% for the past several quarters.

But Alibaba isn’t resting on its laurels. This is because it isn’t just China but also other Asian markets that will see a rise in online shoppers. This has prompted it to invest in Lazada, a Singapore-based e-commerce company founded by Germany-based Rocket Internet. India is another big e-commerce market with several local players. Alibaba has bought stakes in these players, possibly preparing the road for a full-blown entry.

Having been around long enough to establish logistical relationships through Cainiao, payments processing through Ant Financial and a solid core commerce model; Alibaba has been guzzling data that it is in an increasingly better position to use for improving customer experience and feeding its AI initiatives.

Ant Financial, which runs Alipay, has a total of 450 million active users and processes 170 million transactions per day. Alicloud, which grew 103% in the last quarter, is also seeing enhancements. Alibaba is in the process of negotiations with ZTE for the purchase of its telecom gear-making subsidiary ZTEsoft Technology Co.

All these factors are likely to have played a role in the very strong revenue targets management set for the year. Accordingly, management expects that e-commerce, cloud, digital media and entertainment, and of course international expansion will contribute to revenue growth of around 45-49%, or over $34 billion this year.

Analysts and Hedge Funds Opinions

Alibaba‘s stock had its “buy” rating reiterated by investment analysts at HSBC Holdings plc in a research report issued to clients and investors on Saturday, July 22nd. They presently have a $168.00 target price on the specialty retailer’s stock, up from their prior target price of $162.00. HSBC Holdings plc’s price objective would indicate a potential upside of 6.67% from the stock’s current price.

Several other analysts have also recently commented on the company…..

  • Zacks Investment Research upgraded shares of Alibaba Group Holding Limited from a “hold” rating to a “strong-buy” rating and set a $157.00 price target for the company in a research note on Thursday, June 15th.
  • Bank of America Corporation restated a “buy” rating and set a $161.00 price target (up from $144.00) on shares of Alibaba Group Holding Limited in a research report on Sunday, June 11th.
  • Finally, Jefferies Group LLC restated a “buy” rating and set a $160.00 price target (up from $122.00) on shares of Alibaba Group Holding Limited in a research report on Monday, June 12th.

One research analyst has rated the stock with a sell rating, three have assigned a hold rating, thirty have assigned a buy rating and three have assigned a strong buy rating to the stock. The company has a consensus rating of “Buy” and an average price target of $162.79.

Several institutional investors have recently made changes to their positions in the stock…..

David Tepper's Appaloosa Management and three other hedge funds took new stakes in Chinese e-commerce giant Alibaba in the second quarter, according to the latest quarterly filings.

  • Appaloosa disclosed a 3.7 million stake in shares of Alibaba, according to a Monday filing with the U.S. Securities and Exchange Commission.
  • Dan Loeb's Third Point bought 4.5 million shares, according to a Friday filing.
  • Stan Druckenmiller's Duquesne Capital and Julian Robertson's Tiger Management also disclosed new stakes of 710,000 shares and 214,000 shares, respectively, in Alibaba, according to filings on Monday.

Harvey’s Options Volatility Indicator

Summary

FY1H18 is generally viewed as having easier comps while industry data and management commentary have been strong, so the expectation is for BABA to beat by a nice margin.

Alibaba has a decent record of beating Wall Street estimates, having beaten consensus earnings estimates in 5 of the last 8 quarters and meeting the estimates in one-quarter. The company has beaten the top line estimates of Wall Street in 7 of the last 8 quarters. Looking at the more recent earnings history, the company has delivered an average earnings surprise of 10.8% over the last 4 quarters. The Chinese e-Commerce giant has a record of beating revenue estimates, delivering tremendous double digit revenue growth.

The strong earnings history, and its better than expected guidance, implies that Alibaba could be in for yet another strong earnings release. The case for an earnings beat is also supported by the current Alibaba Q1 2018 earnings whisper number, which is currently at $0.96, implying a 3 cent beat.

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

 

** OPTION TRADE: Buy the BABA SEPT 15 2017 155.000 CALL at approximately $6.60. Place a pre-determined sell at $13.20.

Note: No protective stop losses added -- but if you wish to do so make it $2.65.

 

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