Alibaba Facing Key Support At $210 Level
Chinese internet giant Alibaba (BABA) has been under a lot of scrutiny over the past year, scrutiny from Chinese regulators and scrutiny from investors it would seem. The company saw its stock nearly double from March ’20 through October ’20, but then the stock plummeted 34% from October through its low in December.
The big drop brought a key support/resistance level into play once again. We see on the chart how the $210 area acted as resistance in June ’18 then the stock danced around the area during the first quarter of 2020. The stock did drop significantly below the $210 level at the low in March ’20, but that was an exceptional period in the market and many key support levels were breached for a great number of stocks.
Some technicians would argue that the $21o level isn’t all that important because of the way the stock bounced back and forth across the price level in the first quarter of 2020, but I consider that period to be a black swan event. What really got my attention on the chart was how the area was resistance in 2018, support in December ’20, and now appears to be acting as support once again.
Something else that I took note of on the chart is how the stock is oversold based on the weekly stochastic indicators. The indicators did just make a bullish crossover and if we look back at similar moves from the past few years it has been a good sign for the stock in most cases. We see bullish crossovers from low stochastic readings at the lows in June ’18, March ’20, and December ’20. Each of those signals led to a decent rally.
Fundamentals are Good, but not Great, and Not as Good as They Used to Be
Alibaba has seen solid earnings and revenue growth in recent years, but the growth rates have come down a little in the last year. I recommended the stock to subscribers of my newsletter on March 19, 2020. At that time earnings had grown by 47% in the most recent quarter and now the most recent report shows growth of 21%. The annual average growth rate was 28% then and remains there now. Analysts only expect earnings to grow by 1% in 2021 and when I wrote my summation last March analysts were expecting earnings growth of 27% in 2020.
Revenue jumped by 77% in the most recent quarter and they have grown by 37% per year over the last three years. Last March the average annual revenue growth rate for Alibaba was 51%.
The Tickeron Fundamental Analysis Screener shows the stock getting high marks in two areas, the Outlook Rating and the Profit vs. Risk Rating. The company gets lower than average marks in the Valuation Rating and the Price Growth Rating. There are three areas where the company scores in the average range.
One area where Alibaba is above average is in its profitability measurements. The return on equity is 20.5% and the profit margin is 31.6%. Both of those figures are well above average.
Analysts Are Extremely Bullish on Alibaba
One thing I try to incorporate into each stock analysis that I do is sentiment analysis. I try to look at three sentiment indicators with each stock: analysts’ ratings, short interest ratio, and the put/call ratio. When I went to look at the analysts’ ratings for Alibaba I was shocked by two different things. According to the Wall Street Journal, there are 56 analysts covering the stock. The total number of analysts following the stock was shocking. I don’t think I have ever seen such a high figure and this is an indicator I’ve been looking at for close to 20 years. Alphabet and Apple are two of the most widely followed stocks that I’m aware of and they have 46 and 43 analysts covering them, respectively.
The second shocking part about Alibaba’s ratings was the overwhelmingly bullish consensus. There are 49 “buy” ratings and five “overweight” ratings. When I evaluate the overall ratings, I lump the buys and overweight ratings together and then look at them as a percentage of the overall ratings. I call it the buy percentage and in the case of Alibaba, the buy percentage is 96.4%. Like the total number of analysts, the buy percentage is shockingly high. The average buy percentage falls in the 65% to 75% range.
The short-interest ratio is 2.6 and that is slightly below average, but not alarmingly low with the average ratio falling in the 3.0 range. The number of shares sold short dropped from 46.84 million to 43.44 million and while that is a nominal change, it does suggest a slight increase in optimism.
On the options front, there are 1,209,932 puts open and 1,259,318 calls open at this time. This gives us a put/call ratio of 0.96. The current ratio falls in the average range when compared to all other stocks, but the ratio is elevated compared to Alibaba’s historical figures. Throughout most of the second quarter the put/call ratio has ranged between 0.77 and 0.81 but has been trending higher over the last month. This suggests that option traders are becoming more bearish toward the stock. At the very least they are becoming more neutral.
The Overall Outlook for Alibaba
Tickeron’s scorecard has Alibaba rated as a “buy” right now and that is mainly due to technical factors. The daily technical indicators are pointing to a bullish move over the next few weeks and as I pointed out the bullish crossover from the weekly stochastic indicators should be a good sign. As the title of the article suggests, the $210 level is critical in my opinion. If the stock were to break that support, the next support levels are $170 and $150.
Personally, I have Alibaba rated as a hold currently and that is based on the overall picture. The fundamentals are neutral with two good marks, two bad marks, and three neutral ratings. I’m also not a big fan of how bullish analysts are on the stock. With the sheer number of analysts covering the stock, there isn’t much room for additional coverage. With over 96% of analysts already rating the stock as a “buy” there is hardly any room for upgrades, but there is plenty of room for downgrades.