Ali Baba (GRANDMA) rose sharply on Thursday after news that it was merging with rival Tesla Xpeng (XPEV) on driverless car technology. But is BABA stock a buy right now?
Alibaba and Xpeng are opening a computing center that will use Alibaba’s cloud division to work on driverless car software. Alibaba was an investor in Xpeng before Tuesday’s news.
Recently, the headline flow has been heavy around Chinese stocks. Chinese stocks rose on July 7 after a Bloomberg report that China was considering allowing local governments to sell up to $220 billion in bonds for infrastructure spending.
Alibaba shares jumped on June 17 but pared early gains after Reuters reported that China’s central bank had accepted Ant Group’s application to set up a financial holding company. But BABA shares fell 11 percent on July 29 after Alibaba was added to the SEC’s list of Chinese firms facing delisting in the U.S. over Beijing’s refusal to allow U.S. officials to review
In early November 2020, Chinese authorities halted Ant Group’s $34.5 billion IPO in Shanghai and Hong Kong. Ant Group is the fintech arm of Alibaba. The decision to suspend the IPO came after Shanghai Stock Exchange officials said the exchange would suspend the listing due to the company’s inability to meet conditions amid changes in the regulatory environment.
Sentiment was also positive around Alibaba shares and other similar Chinese stocks JD.com (JD) and Pinduoduo (PDD) at the end of April. Bloomberg then reported that Beijing was negotiating with the US to allow regulators to conduct on-site audits of US-registered Chinese firms.
Alibaba Stock: Recent Gains
Alibaba shares rose in late May after the company reported adjusted earnings of $1.25 per share, down 20% from the previous quarter but above the consensus estimate of $1.07. Revenue rose 13% to $32.2 billion, helped by strength in its domestic e-commerce business.
In a sign of confidence in its business, Alibaba announced that it will increase its buyback program to $25 billion from $15 billion. It has already bought back 56.2 million shares for $9.2 billion.
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Results for the current quarter are expected on Thursday before the open. Adjusted earnings are expected to fall 42% to $1.50 a share, with revenue falling 3% to $31.02 billion.
Sellers hit BABA Stock
Increased regulatory scrutiny has weighed on Alibaba and other Chinese stocks over the past few years. Besides a tight regulatory environment, Chinese stocks are also dealing with a slowing economy, Covid shutdowns, supply chain issues and inflation.
In April 2020, Chinese regulators fined Alibaba $2.8 billion following an antitrust investigation. At the time, BABA stock looked poised to break out of a downtrend. But the stock was rejected at its 50-day moving average. It tried to rally above the 50-day line again in late April, but sellers pushed the stock lower again.
BABA shares fell another 8% on November 10 after Chinese regulators announced new draft antitrust rules for Chinese online platforms such as Alibaba and JD.com, among others.
Alibaba jumped 10% on Dec. 6 after news of a management shakeup and overhaul of its e-commerce business. Maggie Wu stepped down as chief financial officer in April. Her replacement, Toby Xu, joined Alibaba in July 2018 and was appointed deputy chief financial officer in July 2019.
Alibaba also announced plans to restructure its e-commerce operations by forming two new digital commerce divisions focused on international and domestic markets.
Meanwhile, investor reaction has been tepid to the company’s Investor Day on Dec. 16-17 Soon after, BABA shares tumbled nearly 4% on Dec. 22 after China’s IT regulator disciplined the company for failing to report an open-source security vulnerability to the government.
Fundamental Analysis of Alibaba Stock
It’s hard to find a company with a more impressive growth track record than Alibaba. The company has a five-year annualized earnings growth rate of 22%, although revenue growth has slowed in recent quarters
Expectations were high for the annual Alibaba Singles Day shopping event in November, China’s biggest shopping day. The company did not disappoint with sales of $84.5 billion, up from $74.1 billion in the prior period.
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The company managed to achieve high growth despite a slowdown in its core e-commerce business.
Alibaba’s business in China is very similar to Amazon’s in the US. Alibaba’s cloud computing business is showing solid growth, just like Amazon’s booming web services business.
BABA Stock: slow valuations
on Alibaba Composite rating of 35 (on a scale of 1-99, with 99 being the best) is mainly affected by the weak price performance in recent months.
Annual return on capital of 15% helps it earn solidly SMR rating (sales + margins + return on equity) of B from IBD Stock Check (on a scale from A to E with A at the top).
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Alibaba is expected to earn $7.02 per share in its current fiscal year 2023, down 16% from fiscal 2022. But growth is expected to increase in 2024 by 18% to $8.25.
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Technical Analysis of Alibaba Stock
on Alibaba line of relative strength started to point down amid recent selling pressure.
A stock’s relative strength line, found on Investors.com’s daily and weekly charts, compares the stock’s daily price performance to the S&P 500. An upward-sloping RS line means the stock is outperforming the S&P 500. A downward-sloping line means the stock lags the S&P 500.
Alibaba shares broke above the trend line on May 26, helped by a strong earnings report. It didn’t take long for BABA stock to regain its 50-day moving average. Alibaba was sandwiched between its 50-day line and 200-day line for a while, but support gave up
Alibaba’s Accumulation/Allocation rating fell to C-, hit by some above-average volume declines in recent days.
BABA Stock: Buy Now?
Air supply is a concern for BABA stock, with Alibaba down more than 50% from its high. That means Alibaba stock is not a buy now. It would be nice to see a decisive move above the 50-day line, but even if BABA shares do so, the 200-day line around 116.50 is a potential resistance level to watch.
Follow Ken Shreve on Twitter at @IBD_KShreve for more information and market analysis right now.
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